Make Poverty History

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We will never make poverty history until we rip up the tax system

Mark Braund, Saturday December 3, 2005 The Guardian

Despite the prime minister’s resolve, the year in which Britain was to lead the world in making poverty history has achieved little. This month there is one last opportunity as the World Trade Organisation gathers in Hong Kong. But even if this meeting throws up some surprises, we will end the year little closer to ending poverty. Increased aid, debt cancellation and fairer trade would certainly have some impact, but they would not address the underlying causes of poverty.

To their credit, Tony Blair and Gordon Brown seem genuinely committed to reducing poverty in the developing world. But commitment is not enough. Their ambitious plans were doomed from the start for political and economic reasons.

Any strategy to reduce poverty in poor countries based on aid, debt relief and trade justice has to be paid for by rich countries, and this has consequences for their economies. Britain may be able to absorb the costs, but other countries cannot. Try telling France’s disaffected youth that more taxpayers’ money must go to Africa, or their struggling farmers that more food must be imported from the developing world. But even without this considerable political constraint, the strategy is unlikely to succeed because it does not take proper account of the economics of poverty. All the governments of rich countries remain committed to current global economic arrangements and believe a solution to poverty is available within that framework. They see poverty as a side-effect of economic advance, a problem to be addressed through policy adjustments, and refuse to accept it is part of the system.

One can see that the neo-classical economics that currently dictates policy, and that has driven globalisation, has little to offer when it comes to tackling poverty. It is reasonably effective at promoting economic growth. But growth does not assure the equitable distriution of wealth, and often appears to have the opposite effect, especially in the developing world.

If the objective is reducing poverty, then economic progress should be judged by measuring not growth, but poverty and economic exclusion. This reveals that after several decades of steady improvement, the situation in sub-Saharan Africa has deteriorated every year since 1984. Despite this, it seems never to cross the minds of the world’s finance ministers that the theoretical basis for the global economic revolution of the past three decades might be fatally flawed.

The forces that cause deepening poverty in poor countries are also at work in the rich. This is why Labour’s commendable targets for reducing child poverty have been so difficult to achieve. Poverty in the developing world can be successfully tackled only by removing its root causes. This requires us to return to economic first principles and to look to the founding fathers of worldly philosophy. It was clear to Adam Smith that any philosophy for a fair society needed to acknowledge the economic forces that determine the distribution of economic opportunities and therefore wealth. It was Smith’s near contemporary David Ricardo who made explicit what was becoming obvious: if the ownership of land and natural resources is grossly unequal, then wealth and wellbeing will be the privilege of the minority. And as the economy develops and more wealth is created, the gap between rich and poor will widen. This is an inescapable conclusion of classical economic theory, and although the world has moved on since Ricardo’s day, the fundamentals remain the same.

Consider Mozambique, an African success story where the economy is growing at 10% annually. The capital, Maputo, boasts one of the finest colonial hotels on the continent. But as the new indigenous elite enjoys London-priced cocktails in its sumptuous bar, only a few miles away their fellow citizens are still living in the iron age. Fairer trade would increase the wealth-generating capacity of countries such as Mozambique, but without measures to address the root cause of poverty, the poor majority would feel little of the benefit.

Neo-classical economics is considered to be a minor updating of its Enlightenment predecessor. But in the process of that updating, key aspects of the earlier version have been discarded. Only those elements likely to serve the interests of minority privilege have been preserved. If a small group of wealthy citizens set out to devise an economic system that would enable it to expand its wealth and entrench its advantage, it is hard to imagine a better system than the one we have today.

It is reasonably easy to make a moral case against the obscene wealth of the super-rich, and for a more inclusive and just global economic order. But that moral argument must be presented alongside a sound economic strategy. If our present minority-favouring economy is based on a false understanding of economics, then a revised understanding is needed in order to create an economy which serves the interests of the majority.

The early economists set out to find a means by which individual freedom and social justice could be reconciled. The evidence of the intervening two centuries suggests that not only were they ahead of their time, but also ahead of ours. Far from trying to emulate their attempts to reconcile freedom and justice, we assume them to be irreconcilable. As a result, politicians and activists divide into two camps: those who prioritise individual freedom, but fail to acknowledge that freedom is worth little without economic security; and those who prioritise social justice, but struggle to come up with a sound economic strategy for promoting a more equitable distribution of wealth.

Arguments about freedom and justice often centre on taxation. Those on the right argue that taxing personal income is a disincentive to individual enterprise, while taxing corporate profit undermines the ability of firms to invest for the future. The left counters that as private enterprise and free markets are unable to provide economic security for all, the redistribution of wealth through taxation is imperative if a sizeable part of the population is to avoid destitution. Both sides have a case. Taxation does limit wealth creation. But, without some redistribution, millions more would fall into extreme poverty. Taxation of personal income is an infringement of people’s right to keep what they earn. But that infringement is as nothing compared to the experience of those denied viable economic opportunities.

Instead of arguing over how much we should tax, we should be asking why an economy based on free markets and private enterprise is so incapable of delivering opportunities and security for all. This brings us back to classical economics. If access to the land and natural resources upon which economic activity depends is concentrated in the hands of the few, the many will struggle to find adequate life-sustaining opportunities. This conclusion drove Ricardo to despair. Two centuries ago there was no possibility of persuading the aristocracy that wholesale changes in land ownership were needed to reduce poverty. After staggering economic and technological advance but still no end to poverty, we may be more receptive. But we still need a mechanism to widen access to economic resources without threatening individual freedom.

A neat solution was proposed more than a century ago by an American economist named Henry George. Today, his followers are subjected to unfair accusations of intellectual naivety by the economics mainstream. But his ideas deserve a hearing because they adhere to the essential truths of classical economics, and because they promise an economy in which individual freedom and social justice become co-dependent rather than mutually exclusive. For George, the key to transforming the economy lay in the tax system. He argued that instead of taxing effort and enterprise through taxes on incomes and profit, we should tax ownership and the exploitation of natural resources.

Currently, people who own land are entitled to keep the full amount of any increase in its value. As land generally rises in value, their wealth increases regardless of how much work they do. If this income were taxed, there would be no incentive for anyone to amass large landholdings, and land ownership would be spread more widely. Supporters of such land-value taxation suggest it could ultimately replace traditional taxes as the source of public revenue, thus increasing the capacity of the economy to generate wealth, as well as ensuring its more equitable distribution.

By reforming the tax system to reward effort rather than ownership, many more people would gain access to economic opportunities. Admittedly, the super-rich would have less freedom to amass huge personal fortunes, but if our democracy is working as it should, they would eventually have to accept that their privilege comes at too great a cost to wider society.

Look at the argument for such change: the promise of an economy that encourages private enterprise; that is dependent on the free play of market forces; that reduces the role of government to that of provider only of those services not suited to private provision; and that provides opportunities for everyone prepared to take responsibility for their economic welfare. It is a no-brainer.

Such revisions to the tax system would have to be accompanied by other similarly motivated policies if the economy were to be transformed from a servant of minority privilege into a provider of majority justice. These would have to include reform of the global monetary system which allows banks to create unlimited credit for large corporations while denying small loans to those who need them to help themselves out of poverty. It would also require an end to the kind of casino capitalism that allows the rich to speculate on financial markets, sometimes causing whole economies to collapse, forcing millions into poverty. What these reforms (of the tax system, the monetary system and financial markets) have in common is they all target unearned income.

In poorer countries the pace of economic liberalisation makes matters worse. Russia is a perfect example of how rapid deregulation causes land and natural resources to fall into the laps of a fortunate few. It now rivals Mexico as the country with the largest gap between the rich elite and the poor majority. And it does not require corrupt government for assets to be scooped up by the likes of Roman Abramovich. It happens anyway, as those who are wealthy borrow money to acquire more land and the rights to exploit mineral resources.

In the developing world the situation is more serious. In these mainly agricultural economies, the only way for most people to make a living is by growing their own food. If, as in Africa, the most productive land is taken over by cash crops for sale to rich countries, then the life-blood of ordinary people dries up. This may be happening because of the need to repay crippling international debt, but even if that debt were written off these businesses would continue to flourish. As they became more successful they would use more technology and employ fewer people. No jobs, no land to farm and no social security system. More than anyone, the people of the poorest countries need a mechanism to ensure they have access to land.

The long-term redistribution of economic resources through a reformed tax system that targets unearned income promises an end to poverty in rich and poor countries alike, because it strikes at the root cause. We have a choice. We can arrange the global economy so that only a minority have access to it, and then tax their earnings to mitigate the poverty of the rest. Or, we can arrange it so all have access to economic opportunities. The first will relieve the worst of today’s poverty but do nothing for tomorrow; the second could eradicate poverty once and for all.

For too long we have accepted the argument that there is no alternative to current arrangements. If growing numbers can be persuaded that there is an alternative, one that is morally desirable, likely to promote individual freedom and social justice, and that is backed by sound economics, then we might succeed in making poverty history.

Mark Braund’s book, The Possibility of Progress, is published by Shepheard-Walwyn.

The Ultimate Eco Tax

Karl FitzgeraldTrue Cost EconomicsLeave a Comment

by Karl Williams

Countless indigenous peoples and social philosophers throughout history have reiterated the ageless wisdom that it’s plain wrong to own land. Land is the gift of nature, and should be the equal and common birthright of all humanity, yet we find that it’s bought, sold, and monopolised like a mere commodity.

We don’t just refer to agricultural land. The locational value of urban land is built up by the amenities and services provided by the surrounding population and its tax-funded infrastructure. By rights, land-owners should repay society for their exclusive use of such valuable land, and a system of regularly assessed land value taxation (some call it community ground rent) is the elegantly-simple means. We don’t just refer to agricultural land. The locational value of urban land is built up by the amenities and services provided by the surrounding population and its tax-funded infrastructure. By rights, land-owners should repay society for their exclusive use of such valuable land, and a system of regularly assessed land value taxation (some call it community ground rent) is the elegantly-simple means.

By tapping into this natural and equitable form of public finance, we would be able to phase out punitive taxes on honest (i.e. non-speculative) wealth production. In other words, “Pay for what you take, not what you make”.

Henry George (1839-97) is the inspiration for a revived Georgist (or Geoist) movement which has again taken up this noble cause, and is calling on fellow Greens to go further in their proposed tax reforms. As well as the current eco-taxes on air, water, logging, mining and fishing rights, we should be advocating taxes on users of:

a.. land
b.. the electromagnetic spectra
c.. air flight paths and geostationary orbits
d.. any other part of the Global Common (e.g. as the Dark Night Society proposes, there should be a tax on annoying security spotlights, on stadium lights which upset nocturnal animals, and on any lights which obscure the stars)

But land is the Biggie. Because of its unique qualities, land value taxation (LVT) encourages us to put land to its optimal use thereby minimising urban sprawl and wasteful agricultural practices. Similarly, LVT prevents land speculators from holding land idle in the expectation of future, ill-gotten gains.

At the moment, we’re born on to a planet where “all the seats are taken” so that we have to pay the former generation for permission to live. Rising land prices are not “healthy” or “buoyant” for the economy – rather, it makes the whole problem worse. However, when society collects the full rent of land, the market price of the land (not the improvements on top of it) will have been reduced to around zero (brevity disallows an explanation).

When the economy is turned right-side-up, there are lots more spin-offs, including important environmental safeguards. Furthermore, both tax collection costs and compliance costs will be a tiny fraction of the immensely wasteful burden they are today. And tax evasion will be a thing of the past – you can’t hide land!

Gone, too, will be the intrusive practices of the Tax Commissioner, prying into all aspects of our activities. We should be monitoring carefully those who use natural resources, not people’s personal affairs!

We could also afford to invest in public infrastructure such as public transport, as the enhanced land values which result will be “recycled” back into the public purse, rather than enriching landowners.

We belong to the Earth, not vice-versa!

How Do You Value A Tree?

Karl FitzgeraldTrue Cost Economics2 Comments

What’s the worth of the beauty of a tree, in hard dollar figures? What about its climate-stabilising value, the value of its biodiversity, and every other intangible value we’d like to defend?

By Crikey, this is no mere academic exercise, for the Common Wealth is currently being trashed precisely because these values aren’t being measured and accounted for. But there’s real hope, as you’ll see.

MEASURING THE VALUE OF A TREE – Karl Williams

Here’s a beautiful-sounding quote by David Bohn (who’s he?) on a poster that’s been up on my bathroom wall for about twenty years: “Wilderness should exist solely for its own sake. No justification, rationale or excuse is needed. For its own sake and no other reason.” Poetically-moving, yes – but the only problem is that I don’t believe it any more.

Two vastly different worlds must be drawn together. On the one hand, there’s a rapacious economic system that not only demands that Nature’s gifts be expressed in material (i.e. dollar) terms, but that their value be calculated (and significantly undervalued) by what the market is prepared to pay for them ….. and not a cent more. On the other hand, there are the Defenders of the Forest (and oceans, airs, gene pools etc.) who proclaim it sacrilegious to assign any grubby dollar value to living nature, as if it could be treated as a mere commodity.

They’re both wrong, but there’s a way out. These worlds can be drawn together – indeed, they *must* if we are to fully respect the natural world and, on the other hand, not indiscriminately stand in the way of the use – fully costed – of natural resources.

It was in a moment of exhilaration in nature, down in Tassie with K2 and Leo Foley, that I told those guys I’d spill my geoist thoughts and feelings on this monumentally-important subject. We’d just visited the dedicated souls who were defending a well-organised blockade of a logging road in the magnificent old growth that is the Weld Valley, south-west of Hobart. Perhaps only after one has been up close and personal, picking one’s way through the thick understorey, can one appreciate that this area is priceless …… almost!

No, it’s not literally priceless, and it’s not good enough for forest defenders to make such haphazard claims. Poetic flights of fancy might sound terrific at a book reading, but in a court of law or cabinet room, decision-makers must be able to compare apples and apples in a true cost-benefit analysis to properly carry out their responsibilities to all sectors of society.

The need is urgent. That voracious corporate predator, Gunns Ltd., has the Weld Valley (and countless others) in its sights, and all the ancient biodiversity of many such places have been set aside for total desolation by decision-makers who have no idea of how to truly cost natural resources. Indeed, our guide through the thick undergrowth that afternoon was Adam Burling, one of the “Gunns 20” defendants, who are being personally sued by Gunns for $6½ million for attempting to expose its ravenous and obscenely profitable practices.

Valiant though the blockaders’ efforts are, such last minute stopgap measures are high risk and high cost (in terms of both resources and the chance of criminal charges). When the whole system is working against those who seek to save our irreplaceable natural heritage, small groups of under funded conservation groups and individuals will usually be ground down. The Gunns Ltds of this world can muster massive legal machines (paid for by shareholders, and all tax-deductible) and have established all sorts of political connections in order to get the law on its side. Today, money talks and the law sucks.

Fortunately, Rin Tin Tin has run off for help, and geoist measures have come to the rescue, for our philosophy and ultra-practical economic and social system is nothing if not highly-refined in the science and art of valuation. Sure, some of it is work-in-progress, and the rough sketch given here needs a lot of polishing.

But the whole basis of a geoist economy is in monitoring and valuing the use of natural resources, and capturing the full economic rents of them for the benefit of all society. The other side of the coin is that no level of government has the right to monitor the activities and personal assets of people – taxation is legalised robbery, as well as outrageously intrusive. So let’s dispense with all that neoclassical economic nonsense and start to measure the real value of a tree. We’ll sharpen our pencil and first lay down all the different types of values which we’ll eventually factor into our calculation. A short, but not exhaustive, list would include:

the economic value of a tree, of course, such as the market value of its timber and potential wood pulp. Unfortunately, we rarely experience a free and a fair market, all-too-often suffering collusion, cartels, corruption, cronyism and kickbacks – all of which force the market price of the timber products down. It’s testament to a fraudulent economic system that we can pay less than $2 to get the massive Saturday Age newspaper, most of whose pages will never even be opened by purchasers, much less read. Not only do we pay too little for most of our wood products, we generally pay too little for our water, food and fibre in this country. While some are under the impression that they’d financially suffer from a system of natural resource charges, the opposite is true. We must remember that the charges imposed and collected will not be “thrown into the sea”, but will go into the public purse to be used where most needed. Only the squanderers will pay more – and few will be able to waste natural resources in future.

the value of climate-stabilisation, such as the grounding of carbon dioxide and the emission of oxygen. There are a host of “ecological services” delivered by a tree that are ignored by neoclassical economics, whose motto may as well be “If it isn’t a marketable commodity, it’s worthless.”

What price the sheer beauty of a tree? We all like to live in “leafy suburbs”, with access to established (i.e. well treed) parks and perhaps even views to forested mountains. The market, as currently configured, totally ignores such values. Call this value the aesthetic, recreational and, indeed, therapeutic value of trees. Would Matisse have been Matisse if he’d never encountered such Things of Beauty? Perhaps our very cultures would be vastly poorer if our ancestors had existed in barren, clear felled lands. What of the effects on the human spirit of contact with nature? Can you imagine someone – even a testosterone-driven 19-year-old kid – spending an afternoon in a forest or garden and then charging off to kick in a telephone box or tag a train?

Our very soil, the source of life in many respects, is retained to a large degree by trees and their understorey. Short-term slash-and-burn cultures (like ours!) know all too well how cleared hillsides often become eroded and agriculturally useless in as little as 3 or 4 years.

Rich biodiversity is a gift of our forests, with a wealth of untapped medicinal products of the trees themselves, plus the fauna to which they provide habitat. Again, it’s a tough call to try and put a $value on this, but we can now make well-educated guesstimates.

Where there’s more trees, there’s greater rainfall.

And then there’s the value of wilderness to humanity, which is a world apart from controlled and manicured gardens, however beautiful. I’m talking of spiritual value here, and the rhetorical question is “Can one know oneself without knowing the world in which one lives – including the world untouched by human hands?”

Wilderness areas often form the catchment areas of our water supplies, and thus contribute greatly to the quality of water supplies.

Let’s not completely disregard that opening quote – what about the intrinsic value of a tree? We should appreciate that it’s not just the value to humans for which we must account, but also the inherent value to the tree itself. Here’s an anecdote to illustrate which had a powerful impact on me at the time. Some years ago, I was hanging out with those amazing peaceniks, the Jains, in their principle home state of Gujarat, India. My dear companion, Dipak, had been showing me around one particular town when the sight and smell of the wild pigs had become too much for me. These creatures seemed to be everywhere humans lived, scavenging off rubbish and even excrement, and were not a pretty sight – or smell. “Why don’t the authorities just get rid of them? – it’d be very easy to round them up and shoot them painlessly” I declared to Dipak. His reply was short, simple but absolutely indisputable, “They have a right to exist.” And isn’t the intrinsic right of a tree to exist worth at least something?

So, how on Earth do we possibly begin to try and put a dollar value on such intangible, subjective, culturally-conditioned and nebulous factors? As we’ll see, to some extent we don’t have to! In many respects, geoism would protect our natural resources such that there’s already a built-in system of valuation in the first place – call it True Cost Economics.

With natural resources forming the basis of government revenue, it is therefore apparent to decision-makers that such resources should be protected as the goose which provides the golden egg of revenue flow for all society’s needs. Furthermore, such revenue streams might extend, it is calculated for most societies, to the real possibility of a Citizens’ Dividend when that revenue stream is in excess of our present spending needs. Then and only then shall we have governments who truly value the environment enough to protect it, rather than just dispensing the occasional environmental protection order to placate the electorate.

For example, take a patch of forest that is greatly appreciated and reasonably accessible to nearby land-holders. If that forest is clear felled or otherwise devalued, then the perceived benefits of holding such nearby land will be diminished …. and the assessed value of that land, and the revenue stream which would accrue to the government body responsible (be it local, state or federal) would be consequently reduced. There’s your inbuilt restraint on foolhardy state action!

But ordinary eco-taxes are based on the value of natural resources, so what’s new here?” some environmentalists might ask. And, of course, they’re right – but haven’t seen the full picture.

You see, proponents of ordinary eco-taxes, which are a very valuable but lesser substitute for geoism, usually don’t, at this stage of the game, see the Biggie – the need to apply them to land itself. Non-land eco-taxes, such as proper and fully-costed natural resource charges on water use or air pollution, are in themselves an ever-diminishing source of public finance. When you fully tax water, you quite rightly force water users to pay the full cost of water – and therefore to use water sparingly. But, with less water use, the revenue stream from water will, er, dry up. The same goes for taxes on other natural resources such as air pollution charges, fishing licences, mining & logging rights, etc. However, taxes on land don’t force land out of use, but rather force all land holdings to be put to its optimum use, because the land holders can’t afford to sit on land, paying the land value taxation (LVT), and not utilise it according to how the land has been zoned.

Further, by economically encouraging land to be put to its optimum use, it won’t mean that land will be “flogged” or overused. Rather, it will lead to urban infill as vacant or unused land is brought into production rather than having cities sprawling ever further. Valuable land near railway stations, shopping centres and universities will be much more intensively used, all leading to a much more compact cityscape, which is itself much more amenable to the provision of public transport. And when you have less sprawl, you have far less wastage of resources as infrastructure doesn’t have to stretch as far, and as commuting distances are reduced.

Speaking of public transport, the main (and almost unrecognised) reason we don’t have proper public transport infrastructure in Australia is because the massive cost of laying down the infrastructure is effectively a transfer of wealth from taxpayers to landholders. But when we collect the LVT, the enhanced values of land serviced by such infrastructure is “recycled” back into the public purse, enabling the hefty reduction of fares.

Enough of theory – let’s look at a hypothetical situation and crunch a few numbers, and make it interesting by taking a sizzling controversy. I live next to Melbourne’s jewel in the environmental crown, Sherbrooke Forest, so I’d like to assume that a geologist who’s bushwalking there one morning happens to stumble upon some intriguing signs which warrant further investigation. Lo and behold, he’s discovered a massive lode of highly concentrated and easily-excavated titanium, falling exactly within the 800-hectare boundaries of the forest.

As we saw, nothing is priceless, however sacrilegious that may sound. We need to somehow determine the value of what will be lost by the clearing of the forest, and compare that to what will be gained, taking into account all the intangibles that are currently disregarded.

Obviously, then, studies need to be made as to the value of the titanium deposit, and the usual geological surveys are performed, albeit somewhat restricted in this situation because of the forest cover.

So let’s say that the geologists do their studies and their fairly accurate estimate of the total economic value of the deposit comes in at around $500 million. At present, a fraction of this amount would be enough for government decision-makers to give the go-ahead to mine unless the affected area was a marginal electorate. In this case, the media is agog with furious debate, but there’s presently no means of properly evaluating the true costs of what would be lost if Sherbrooke Forest was sacrificed in favour of mining the titanium deposit.

It’s no surprise that such gross undervaluation of our natural assets exists, considering that our entire system of measuring economic performance is utterly perverted. Essentially, our national accounts have a profit and loss statement but no balance sheet. That is, the treasury – which should be the custodians of our nation’s assets – takes no account of what those assets might be and, for practical purposes, largely treats our environment as worthless.

It works like this. If a tract of forest is clear felled, then no account of the loss of the flora, fauna and all the related benefits is made. Indeed, trashing such natural resources will usually show up positively, as it results in “economic activity” as far as employment and exports are concerned. Similarly, the accounting for road accidents will not measure the human suffering nor the damage to property, but will rather show a boost to our GDP with the increase in measurable activity in hospitals, panel-beaters etc. It’s no surprise that a leading exponent for sanity in this all-important indicator is a dedicated geoist, Clifford Cobb, who has been a foremost contributor to the aptly-named GPI (Genuine Progress Indicator). I’ll leave it to you to Google on GPI yourself, assuring you that you’ll be well rewarded in terms of the insight and wisdom that Cliff and his collaborators have put into this analysis.

Meanwhile, back at the abacus, the minerals are worth $500 million and the true value of the forest is, as yet, an indeterminate amount. One of them has to go. Let’s start valuing.

Firstly, we must recognise that the proponents of mining can further claim that they’ll harvest the timber before they mine, and so we need to account for the value of the timber products (magnificent hardwoods in this case) and the related economic activity (x year’s work for x timber workers and associated industries). Conventional economics already handles this type of valuation pretty well, so we’ll skip this analysis and accept the approximate market valuation of $20 million here. So, in order to prevent the clear felling and mining of Sherbrooke Forest, the true value of the forest will have to be estimated to be at least $520 million.

The first-listed value above is “climate-stabilising effects, such as the grounding of carbon dioxide and the emitting of oxygen”. Now, to try and put a value on this isn’t so difficult as it’s actually a serious study of late – with the economic costs of climate change hastening such research, many well-funded studies have already been performed. It shouldn’t come as a great surprise that the calculated economic worth of some of the planet’s life-preserving biosystems have clocked in at some astronomical figures (quadrillions of dollars, by some measures). Such calculations are based on the economic cost of the consequences of climate change along with the costings of human measures to mitigate the effects of climate change.

Some of the more obvious costs of climate destabilisation and global warming are:

Rise in sea levels
Extreme weather events
Spread of tropical diseases
Damage to agriculture

One way of measuring the value of Sherbrooke Forest’s “ecological services” is to estimate the quantity of carbon dioxide (the main greenhouse gas) it absorbs, and apply that to the cost of carbon dioxide emissions.

The cost of such emissions have, fortunately, been brought to the fore in recent years with attempts to limit emissions by the application of carbon emission trading. The set of figures used by the Kyoto protocol is a widely-accepted model, although the costs vary somewhat according to various scenarios. To stabilise the emission of carbon dioxide in the long run, Kyoto deemed that each tonne of carbon dioxide emitted should be costed at around US$300. However, if the severity of experienced climate change requires that emissions be rolled back to 1990 levels, a tonne is costed at US$679.

Going further, if temperature increases start to spiral out of control, as some models predict, then more drastic measures need to be taken to clamp down on emissions. In such a nightmare scenario, to severely curtail emissions to try and limit temperature rises to about 2°C, a tonne should be costed at US$732. Nightmares have never been my bag, so I’m going to apply the Precautionary Principle and adopt this slightly higher figure – if it all turns to be a false alarm, the planet can have a rip-roaring carbon-guzzling party later. So we’re going to use the cost per tonne of US$732, which is about A$975 today.

The other side part of the equation is the carbon-absorbing capabilities of the forest. Let’s call on the NSW Dept of Primary Industries, which recently calculated that planting 100,000 hectares of new forest can take up to 2 million tonnes of carbon dioxide per year (or 20 tonnes/hectare) from the atmosphere.

Shuffling around on the abacus: 800 hectares @20 tonnes/hectare x $975 = $15,600,000/year. Converting this annual figure to a present value by dividing it by 5%, we arrive at a figure of $312 million, being the worth of the climate-stabilisation services of Sherbrooke Forest.

A brief word of explanation about this conversion. This annual value of a perpetual income stream can be converted into the present value (a lump sum) by a widely-recognised calculation using the prevailing interest (or capitalisation) rate. For instance, how much would you pay today to receive $1 per year in perpetuity if the current interest rate was 5%? Without getting sidetracked with explanations, you’d pay $1/0.05 or about $20.

Now, if this figure of $312 million seems excessive, then consider that, four years, ago the respected but somewhat conservative journal Nature published a paper that calculated the value of all the goods and services that the planet provides – it termed them ‘ecosystem services’ – were found to be worth almost twice the total GDP of the Earth.

Yet the valuation model used here is actually conservative when contrasted against some others. Go figure out every disaster that might occur due to failure of the biosphere, to lesser or greater degree, and calculate the price of insurance against all of it. Or, when faced with the looming possibility of ecological meltdown, estimate the cost of replacing the Earth, which may include finding and colonizing another planet.

The noted biologist, Robert Costanza, has taken this less conservative approach and, as one might expect, has arrived at astronomical values for the value of the entire Earth, at least in the hundreds of quadrillions of US dollars.

Moving right along, the second-listed value is that of “the sheer beauty of a tree” – to put a dollar value on is a somewhat curlier job, it seems, so subjective and elusive is such an assessment. But our task is actually much less complicated than it appears.

How much is a work of art worth? Simply, it’s worth whatever people are prepared to pay, and the market mechanism finds an equilibrium point at which buyers and sellers agree on a price. It’s basically the same deal with real estate. How can you put a price on a spectacular view? “Easy!” comes the response from any real estate agent in Sydney, who all know the going rates for greater or lesser views of the waters of Sydney Harbour (better ones fetching a premium of hundreds of thousands of dollars). Similarly, we can estimate the value of access to a railway station, the peacefulness of a certain neighbourhood, proximity to highly-regarded schools …. and views of, and ready access to, Sherbrooke Forest.

Using valuation methodology and software in constant development, valuers could estimate the premium that the market would pay for both very close and very distant access to Sherbrooke Forest, being the difference between property values today and when the mine site will be more of an ugly and noisy liability. Similar studies were done in London recently when estimating the boost to real estate values when the 10-station Jubilee underground line was constructed. Hardware Lane stocks the book “Taken for a Ride” which documents this fascinating study, revealing how British taxpayers shelled out about £3½ billion to construct the line, so that nearby landowners could have their land values boosted by almost £14 billion!

So we apply a similar methodology which shows, to pull a few figures from the air, that adjoining properties would fetch around $100,000 more if Sherbrooke Forest remained, that properties within 15 minutes walk would be worth $20,000 more, and so on. But let’s not overlook those distant western suburbs, whose residents still benefit – albeit in much lesser degree – in having an urban forest at their disposal for a Sunday drive. We’ll only assign $10 as the worth of the forest to them, but as there’s a few hundred thousand outer western suburb dwellings, we’re still looking at a few $mill here. We’ll assume, for convenience sake, that the value of country properties would be unaffected by the any mining.

So then: crunching, rather loosely, all these numbers, we estimate that Melbourne’s 2 million (almost) dwellings have their values enhanced by a weighted average of $100. Therefore, in terms of property values alone, Sherbrooke Forest is worth about $200 million.

But wait! – there’s more. The beauty of the forest is also worth something in terms of the therapeutic and social value of the trees, which we wouldn’t expect to be factored into land values, as estimated above. Now, if I was doing a full-on study, I’d be interviewing health resort managers about their estimates as to the contribution of fresh air and greenery to their patients’ recovery, as well as interviewing social workers and Outward Bound leaders as to the social benefits to screwed-up kids of the experiences to be had in such an accessible forest. I’d tabulate, corroborate and peer-review all this before presenting you with a guesstimate, but seeing I’m not paid a cracker for this job, I’ll just present you with a nice round $10 million value.

Which brings me to an important point: a verifiable, objectively-measured, indisputable valuation is better than a guesstimate such as this. And a guesstimate is better than a wild guess. But cop this, you skeptics: EVEN A WILD GUESS IS BETTER THAN NOTHING! For skeptics to dismiss even a wild guess and declare that no $ estimate can be made at all, and thus assign no value at all, is to effectively make an estimate of the value as zero! I can, with utmost certainty, declare that I can make a more accurate estimate than my opponents by, say, estimating the total value of the therapeutic and social benefits to be one lousy buck. To this, skeptics can raise no argument. Are you with me? For critics to dismiss the estimate of $10 million in this example, they would have to present alternative estimates and be forced to deal with these tricky, intangible areas – it’s just not good enough to ignore the problem and thereby effectively declare the value to be zero.

Onward geoist soldiers – the next value relates to the soil of the forest, much of which will be lost in the mining proposal. But we’ll concede a few points to the miners, accepting that they’ll retain most of the soil and use it elsewhere. However, some will surely be lost, plus there’ll be some lost to run-off which will silt up some waterways and Port Phillip Bay. Guesstimate of the damage: another $10 million.

Next is the value of any lost biodiversity. Admittedly, Sherbrooke Forest is not extensive in area and not unique and, to my knowledge, is not home to any endangered species, but we still need to factor in the Precautionary Principle. This is because our scientific knowledge is constantly updated as discoveries of myriad new species (especially invertebrates) comes to hand. Who knows what Sherbrooke Forest really holds, and what would be lost forever if it were mined? Applying the indisputable validity of the wild guess (compared to those who don’t even deal with the issue), the conservative guesstimate here is $1 million.

What of the value of decreased rainfall? We need look no further than Perth and surrounds, which has lost about a quarter of its rainfall in the last 30 years, basically attributed to less transpiration of water vapour through tree clearing. The economic cost of this can be calculated, in terms of lost production or of the cost associated in acquiring water from other sustainable sources, such as salinification. But, as the forest area under examination is relatively small here, we won’t research the guesstimates greatly. So, crunching loose numbers of $1000 per hectare (because of the lushness of the rainforest of Sherbrooke) and, for 800 hectares, an annual value of $800,000 for the extra rainfall generated in the region. Thus, the net present value of the annual worth of Sherbrooke Forest’s rainfall effect, $800,000, would be $800,000/0.05 or $16 million.

What, then, of the spiritual value of wilderness, whatever that means? How can one measure the benefits of any change or even transformation that sometimes occur when one is alone in nature? While such experiences often tend to be called priceless, we beancounters insist that everything has a price. The problem is not really different in nature from determining the value of goods or services in the market – what are people prepared to pay for them? For instance, those prepared to make many personal sacrifices in their efforts to preserve old growth (‘ken oath!) would, if obliged to sit down and estimate just how much the preservation is worth to them, be able to arrive at a dollar value even it’s no more than the value of their own time and resources sacrificed. Similarly, donations to organisations campaigning against forest destruction are also some sort of estimate of the value people attribute to the value of something not in their immediate vicinity.

Let’s pull some guesstimates out of the ether. Let’s assume that there would be around 1 million Melburnians and 50,000 others prepared to chip in an average of $100 each to try and save Sherbrooke Forest because of this feelgood factor it confers on them. But such money is usually donated where there is only a chance (let’s assume 50/50 chance) of the campaign succeed. Therefore, let’s say that 1,050,000 souls would donate $100 each if there was half a chance of saving the forest, then they may well donate $200 each to guarantee the safeguarding of Sherbrooke. Admittedly, there are all sorts of bells and whistles you could add to this simple model, but here we’re basically illustrating the overall process. DING!– we have another $210 million.

We score a big fat nothing on the water quality factor – as Sherbrooke doesn’t fall within any catchment area, it contributes nothing to the quality of our water supplies.

We’ve left the best until last – it’ll be a cracker of a calculation that nails the intrinsic value of the forest (that is, not the value to us humans, but the inherent value of the forest to exist in its own right). Again, it’s not crass or vulgar to make such an estimation, for there’s some sort of price for everything. Even human life has a price, despite all the rhetoric about life being infinitely precious. Thousands of Australians are killed each year on our roads, yet practically every life could be saved if we didn’t value commerce and convenience more than these lives, because this is what’s preventing authorities setting the speed limit at 30 km/hour (at which there’d probably be no deaths at all). Similarly, military commanders could divert resources to reduce the risk of injury and death to their troops but don’t, on the grounds of reduced effectiveness. Medical schemes, with limited resources, recognise similar limitations, especially if patients are elderly or have reduced quality of life. They’ll never tell you this, though – they have to maintain the absurd illusion that all life is priceless. The other illusion is that life will be saved (forever), rather than merely prolonged, as if death ain’t one out of one.

So what’s a human life – or, rather, the prolongation of a human life – worth? It must, I reckon, be expressed in terms of the ordinary human dimension – the cost borne by the rest of society to pay for its prolongation. I put it in terms of what an average-earning person could battle to save in one year (about $20,000), and multiply this by some factor, which I reckon is about 50 (the number of working years). In other words, the worth of one human life is equivalent to the lifetime savings of another.

So now we have the nice round figure of $1,000,000 – the value of (prolonging) a human life. In other words, most people would agree that a human life wouldn’t be worth prolonging if it came at any more than the cost of sentencing another human to a lifetime of unpaid wage slavery. Want to argue with this? Fine – just don’t avoid the hard call of ascribing a figure, and don’t then avoid justifying why you’re effectively going to put to hard work xxx people for xxx years to “save” this life.

Having doubts about what society will think of you? Oh dear. They’re not worth worrying about, really. Take my word for it and think for yourself. You’ll feel much better later.

So if we value the intrinsic life of a human, we can also do it for animals and plants and, with this guesstimate, we have a ball-park figure to use as a guideline. Taking account of the different life spans & lesser degrees of awareness (sorry, little microbes – you don’t rate), my bespoke software has spat out these numbers – an average of $512.30 for fauna and $1.45 for flora (over 1 year old – call me a seedist if you will). Applying guesstimates of 10 major fauna forms and 5000 major flora forms per hectare in Sherbrooke, we arrive an intrinsic value of fauna of $4,098,400 and for flora, $5,800,000 – a total of , say $10 million . Hmmm…. a guy could get a God Complex if he did this all day.

If dollar valuations like this $10 million sound too abstract, then we can make comparisons as a reasonability check. Contrasting this $10 million with the estimated valuation of the inherent worth of one human ($1 million), we see that we’re in the same ball park. That is, the worth of all living organisms in 800 hectares is equivalent to that of 10 humans. Personally, I think we’ve erred on the side of overvaluing human life, but let’s not get too bogged down here. Obviously, there is no one correct answer, only answers that feel closer to the truth than others.

So, adding up the worth of the trees and other life forms of Sherbrooke Forest, we have:

climate stabilisation ~ $312 million
amenities to landowners ~ $200 million
therapeutic and social value ~ $10 million
biodiversity ~ $1 million
increased rainfall ~ $16 million
spiritual value ~ $210 million
intrinsic value ~ $10 million

These add up to $759 million, which sounds more exact than it is, given the crudity of many of the guesstimates, but the point is that it seems that the true value of the forest is about equivalent to or greater than the value of clear felling and mining it (about $520 million). Given that the forest’s value is at least in the ballpark compared to the mining value, it should certainly force authorities to halt any mining and do its sums a lot more carefully.

Sure, you can bag the short cuts and subjective values used here, but how could anyone deny that this methodology is better than what’s in use today? Presently, it’s the market rules and the environment can go to Hell, and you couldn’t sit down and design a system any more clumsy, pig-ignorant and utterly corrupt as what we have at the moment. The proof positive of this is there for all to see who ventures to the logging coups where *our* natural heritage is being pissed up against the wall. Yes, these awesome tracts of old growth are only “worth” as much as some corporation will bids for them. And if that corporation is anything like Gunns Ltd, it’ll manage to have its trifling “market” bid accepted.

So, the state won’t get anything for a forest’s recreational, climate-stabilising, biodiversity-contributing, inherent value – just a fraction of the *economic* value. That is, the state – even if we assume there will be a fair market process whereby bidders will raise the price paid to the maximum the market should offer – will only get what the rainforest products are worth on the open market. If some corrupt, Third-world country is underselling Australia because it (or its dictatorial kleptocrats and their cronies) want quick bucks from the highest cash bidder, then the knock-on effect is that we’ll be offered even less. And if the rainforest is inaccessible, then the logger’s costs to build extensive logging access roads into the coups will effectively be deducted from their bid. So, as history has shown, when we factor in all the administrative costs and infrastructure that the state often provides to attract logging companies, we’re almost *paying* them to clear fell our forests for woodchips!

Are the enormity of the ecological and other services figures surprising when compared to what’s at stake? If we end up trashing the planet and making it uninhabitable, what’s the cost of reconstruction? Can you imagine the vastness of the task of even experienced reconstruction subcontractors completing the task of replacing Earth, even if they could do so without using Earth itself as a base?

Or try and grasp at the true $ value of the Earth from another perspective – by estimating the replacement costs for the Earth’s biosystems from a serious scientific experiment in total self-sufficiency. The so-called Biosphere 2 experiment involved over US$240 million being spent on developing the infrastructure to support 8 people for two years in a self-contained “bubble” environment. Despite these efforts from some of the world’s great scientific minds, the project failed and fresh air had to be pumped in to save the lives of the participants. So, by this guesstimate, the Earth is worth around A$320 million/8 people × 6.5 billion people on Earth = $260,000,000,000,000 (around 6500 times the world’s current GDP).

This represents the minimum value of the Earth using today’s technology. And, because the project failed, the true value of the Earth must be higher than this unimaginable amount. This seems like a fitting place to end.

IR Reform: Unmentionable Barriers to Job Creation

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IR Reform: Unmentionable Barriers to Job Creation

The Howard government’s industrial relations agenda is supposedly about job-creation, as if the cost of labour — including wages and salaries, penalty rates and other perks, and the difficulty of reversing bad hiring decisions — were the last remaining barrier to full employment.

Sorry that we have to state the bleeding obvious, but:

* Jobs cannot be created unless the employer can pay the rent or mortgage on the business premises out of the proceeds of the business; and

* Jobs cannot be created unless the workers can pay the rent or mortgage on housing within commuting distance of those jobs, out of wages that the employer can pay out of the proceeds of the business.

So, if job-creation is the aim, why is the Government so concerned about the cost of labour and so unconcerned about the cost of accommodation? Why is it bad news when wages blow out, but good news when housing prices blow out? Why is the Government willing to force down labour costs by freeing up the supply of labour — e.g. by requiring more disabled people to seek work — but not willing to force down accommodation costs by freeing up the supply of accommodation — e.g. by taxing vacant land so that the owners have to build on it, and taxing unoccupied premises so that the owners have to seek buyers or tenants?

The only possible explanation is that the unearned profits of property speculators are considered more important than the earned wages of workers. In other words, the property market is privileged while the labour market is not.

Tax Scams & Banking in Russia

Karl FitzgeraldInternationalLeave a Comment


INSITE: Bulletin of the Land Policy Council
Editor: Fred Harrison, April 1996, Vol 2 (3)

Kill the Tax Scams and Create Jobs

IT’ S ENOUGH to make Marx turn in his grave! His arch champion, the Soviet Union, capitulated to the capitalists in 1991 just as the market economies crashed into their most severe crisis since the 1930s.

Government ministers from the seven richest nations on earth burdened with 24m jobless people, double the number since the spirit of Thatcher/Reagan was unleashed in 1979 – met in Lille on April 2 to agonise about what to do. Global unemployment is running at 700m people, according to the International Labour Organisation, but governments are bereft of ideas about what to do to liberate the labour market.

Governments face a double whammy a shrinking tax base and an increasing pool of aging people who need welfare support.

There is no mystery about the problem: the structure of taxation means that employers not only have to carry the cost of employing workers, they also have to carry the cost of public services. Non-wage labour costs represent an enormous proportion of total labour costs. This means that many people who would otherwise be able to provide goods or services to customers with a competitive profit to employers are excluded from the workforce because Wages+Taxes > Revenue, given the resistance to price rises.

There is no mystery about the solution: President Clinton’s chief economic adviser, Prof. Joseph Stiglitz, knows that the optimal fiscal policy – the one that does not distort the economy- is one in which the rent of land and natural resources is treated as the fiscal base. This policy, far from destroying jobs, would positively create them. It’s the market approach to full employment: a partnership between the private and public sectors which reduces prices to their costs of production and therefore expands the demand for workers.

So why are governments not transforming their fiscal philosophy? In his INSITE essay (see page 2) Wall Street analyst Dr. Michael Hudson explains that the financial institutions, operating in a tradition that accords primacy to the interests of the real estate sector, will not allow governments to think about such a reform. Russia is currently suffering the brunt of the threats. The IMF has just advanced a $9bn loan to Boris Yeltsin on the condition that their idea of what constitutes “the market” is adopted. This has forced the Russian president to sign an illegal decree which privatises the rent of land. That rental income, when tied into loans linked to land as collateral, will flow out of Russia and thereby tilt the tax system further against the workers.

RUSSIA is learning that global markets emancipate the corporate giants from the clutches of the tax authorities. Britain, for example, is chasing £100bn in unpaid taxes, penalties and interest – and is adapting anti-money laundering laws to try and snare the funds that ought to be flowing into the public coffers. A conference on money laundering in Lisbon this month will be reminded that multinationals use creative accounting techniques – such as reporting profits in low-tax territories to side-step their fiscal obligations.

Because the multi-nationals dodge their tax liabilities, the fiscal burden falls mainly on employees. And governments suffer because they have to plug the deficits (the 15 European Union countries have a total budget deficit of 296bn pounds) by borrowing. That borrowing then disrupts the economy by forcing entrepreneurs (who need to borrow to start new businesses) to pay higher rates of interest than would otherwise be necessary.

Russia, like other nations that do not regulate the flow of capital, has to learn that there is one way only to snare the full taxable surplus of the wealth creators without disrupting the economy: drawing its public revenue from the publicly-created rent of land. That policy would also stop the drain of public revenue into private pockets: you cannot conceal prime commercial sites near the Kremlin in a bank in Switzerland!

Rent-privatisation will ruin the chance to create a fair and efficient economy in Russia, says Michael Hudson. The West should learn the balance-of-payments lessons behind the hijacking of land and resource rents.

[DR Michael Hudson is a Wall Street analyst and a leading balance-of-payments theorist. His Super Imperialism: The Economic Strategy of American Empire, was published by Holt Rinehart & Winston, New York, 1972. 1t revealed how the US uses the World Bank and IMF against European and Third World countries.]

Banking on Rent

MOST debt in the modem economy is mortgage debt. This is because the land, natural resources and other real estate is by far the largest asset. In the US, for example, land accounts for about 40% of assets, homes and office buildings for another 20%. Creditors are eager to lend money against such collateral, because it is the most valuable asset.

The principle of mortgage lending is simple: A banker can lend money up to the point where interest and amortization absorb the entire net rental income (or its equivalent value to owner-occupants). This transformation of rent into interest has occurred in every major industrial economy, from America to Japan.

As the land becomes mortgaged, bankers convert the rental revenue generated by farms and forests, mines and oil wells, office buildings and residential housing into interest and amortization payments. As the home market for such credit is exhausted, lenders remit their earnings abroad to continue the process wherever incomes or asset values remain unpledged to creditors.

The transfer of earnings abroad will gain momentum as foreign banks and financial institutions establish subsidiaries. In a country like Russia the “foreigner” is simply a Russian operating out of his offshore bank account. Inasmuch as financial capital knows no country, it tends to flow to wherever in the world interest rates are highest and free income remains unpledged for debt – today into Russia tomorrow out of it.

THE remission of interest and amortization on loans puts downward balance-of-payments pressure on the rouble. And as its international value falls, the main victim will be Russian workers. This is because prices for most economic inputs – fuels and other raw materials, paper and wood, capital goods and interest rates – are uniform internationally, and are set in US dollars. The most important domestic variable to be devalued is the price of labour. Regardless of what labor unions may win, wage gains and public income supports are offset by the currency’s decline. This explains why IMF “austerity plans” involve devaluation as a basic anti-labour strategy.

As the rouble falls. domestic output is siphoned away from the home market as the export market (priced in foreign currency) becomes more profitable. Consumers must pay more for imports, as well as for domestic goods whose prices are raised to the higher levels of imported goods.

As land becomes a commercial asset and an object of financial speculation, the tendency is for it to pass into the hands of absentee buyers and creditors, especially for the most valuable sites. As economic conditions deteriorate, distress sales and emergency borrowings increase. Many Russians living on low wages will be tempted to use their land as collateral for loans to balance their income and expenditure.

This has never been a stable situation for any economy. Adding interest charges to a family’s already tight living expenses makes it even harder for them to survive. Inevitably, much of the land sold to absentee owners. The moral is that privatizing the land gives its present occupants the freedom to lose their tenure righs. If they seem to gain in the short run, it is ultimately to benefit the absentee owner or creditor. And because Russia’s savings has been all but wiped out, today’s major source of credit and purchasing power is abroad.

THE indebting and forfeiture of land has been occurring for four thousand years. What is new in Russia today is the foreign-exchange effect. As land is loaded down with debt, its revenue is remitted abroad. (The IMF bans capital controls.) This capital outflow by Russian banks and lenders represents the hidden depth charge in Russia’s privatization plan. It is the major Western objective in Russia. It is this objective that shapes IMF and World Bank advice to Mr Yeltsin. Privatization thus does not mean ultimate Russian ownership and enjoyment of the revenue produced by its land and raw materials. It means turning over this revenue to repay debts to foreign creditors.

The mature industrial nations have a problem. They have an expanding mountain of savings which keeps growing. Much of this saving ought to be plowed into investment that produces more goods and services, creates jobs and improves the quality of life. Instead, the banking and financial system rolls over each year’s interest income and amortization (and capital gains) into more new lending. This expands the economy’s burden of debt-claims at compound interest rates.

Industrial profits likewise are diverted into the bond and stock markets as it becomes more profitable to extract interest than to invest directly to make the economy grow. In colloquial American terms, Wall Street “downsizes” Main Street: workers are sacked, capital equipment is not upgraded, and the public infrastructure is left to decay: roads and bridges, air and rail transport, the education and health systems. And the worse matters get, the less incentive there is to make new direct investment. The stock market may rise, and bond prices also as interest rates fall. But this is simply because savings are not going into building or modernizing new factories or undertaking more research and development. More savings are plowed into lending at interest, even as the economy’s ability to pay this interest is being hollowed out by its deflationary debt burden.

The essence of double entry book-keeping is that one person’s saving is another’s debt. Financial claims on wealth tend to grow more rapidly than the means of production, or the incomes of labour or industrial capital. “Paper wealth” thus overtakes “real” wealth.

Marx called this phenomenon the “self-expanding power of capital”. He made fun of this term, for obviously debt (finance capital) cannot continue indefinitely to grow more rapidly than the ability to pay interest. Marx therefore considered the financial system to be composed increasingly of “fictitious capital”, that is, of debt-claims in excess of the economy’s abillty to pay the stipulated interest.

Marx was an optimist in believing that finance capital would become subordinated to industrial capital. He thought that creditors would use their interest to finance the industrial system’s productive powers. But this is not what occurred. Emperors of finance conquered captains of industry. The process culminated in the 1980s, when financial raiders took over industrial companies using high-interest “junk bonds” as their weapon in corporate takeovers.

Like taxes, interest charges become elements of intemational pricing. They are not returns to the factors of production, they add to the economy’s overall cost structure. This is what worried American trade strategists in the closing days of World War II, when they decided to exclude Russia from the World Bank and the stillborn International Trade Organization. (See Ch. of Super Imperialism: The Economic Strategy of the American Empire). The fear was that socialist economies were free of a major cost that burdened the finance-capitalist economies. Capital invested in socialist enterprises did not have to pay interest. Nor did it have to bear the cost of market real estate rental. In the West, interest costs are factored into the cost of capital used up in producing output (including exports). Tax charges likewise must be defrayed out of sales proceeds. This increases the cost of exports for highly indebted economies, as compared to economies with lower interest rates and taxes (such as Hong Kong). American officials actually worried that Russia might have an economic advantage in this kind of market competition between socialist and capitalist countries.

Of course, the Soviet economy had a cost burden of its own: bureaucratic inefficiency. The question was, which kind of overhead would prove to be more costly in the end: finance-capitalism, or bureaucratic collectivism?

Russia’s economy can now obtain the best of both worlds: avoiding statist inefficiencies by using market reference-points. while minimizing, the debt and rental burden by promoting user-occupancy of the land rather than absentee ownership. Will Russia follow Hong Kong’s example by financing its public spending out of the rental income of land rather than labour and industrial capital? These are the issues which will determine the outcome of competition between Russia and the mature industrial nations.

The central issue is the kind of banking system Russia will have. Will it follow the German long-term investment-banking model? Or, will Russia retrogress and adopt the much less successful Anglo-American merchant-banking model which focuses mainly on real estate, lending money against whatever collateral is easiest to foreclose on? A passive banker lends on real estate and bills due for output already sold. An active banking system lends to create the productive assets that generate the interest to repay the loan.

Collateral-based banking ends up lending money mainly against the land and natural resources. (About 70 percent of U.S. bank lending takes the form of real-estate mortgage lending.) This does not bring new productive assets into being; it merely loads down the wealth creators with more debt, diverting more of a shrinking income stream into interest and amortization payments.

This means that land rent is collected by the banking system rather than by society. It is more efficient to create a banking system that finances new direct investment, instead of merely foreclosing on existing property, financing absentee ownership and speculation, and creating the kind of fiscal crisis that is now plaguing the Western economies which are being de-industrialized.

The industrial economies are in a debt crisis, above all a real-estate crisis since their financial bubbles broke in 1989. In modernizing Russia’s economy, I hope that they aim at getting the best of both worlds. But I fear that the Yeltsin/World Bank plan will burden Russia with the worst of both worlds: bureaucratic corruption stemming from the privatization of land and mineral assets, and a banking system that burdens the Russian economy with a growing debt rather than financing its industrial and agricultural modernization.