In the Land Down Under, Sydney:
Promise Fulfilled?

Edward J. Dodson

PART 3 of 3

APPENDIX A

The above paper was written in May of 1989 while I was working toward a masters degree in liberal arts at Temple University in Philadelphia, Pennsylvania. Although the title for the course was, "Great Cities of the World," taught by Professor Carolyn Adams, the nature of our discussions focused on the enormous challenges faced by the people living in cities where basic amenities are available only for the privileged few. I chose to write about Australia, and Sydney, to show that even under the near-ideal circumstances, our existing, traditional socio-political arrangements and institutions yield inequality of opportunity. Thus, the differences between societies are differences of degree rather than kind.

What follows are excerpts from the comments provided to me by Professor Adams and my somewhat long response (to which she did not reply).

Professor Adams:

As I expected, I learned quite a lot from reading your paper. Australia is, frankly, a society that I know very little about. For example, I hadn't realized (until reading this) that Australians had responded early and favorably to George's single-tax notion.

I especially admire your ability (in both your writing and your classroom commentary to make connections between urban problems/conditions and macro-economic forces (like foreign debt or balance-of-payment issues). Your facility in moving between those two levels of analysis is rare, I think. I also think you have an unusual appreciation for the historical antecedents of contemporary problems.

The one thing that I thought needed clarifying in this paper was your position on the extent to which political decisions in Australia (such as the emphasis on land tax) actually have determined Australia's economic development. Your very last statement, that politics determines economics, seems to assert that Australia's economy is the product of political decisions, and yet your paper doesn't really prove that.

In fact, it seems to me that it's possible to argue the issue the other way around: that economics determines politics (or at least, determines policies). For example, one Australian housing specialist named Jim Kemeny (his article is: "Home Ownership and Privatization," International Journal of Urban And Regional Research, 1980, pp. 372-387) argues that the increasing burden of home ownership on the population, as mortgage payments become a larger portion of household expenditures, actually dampens the tendency toward the welfare state. Families, especially young families, resist giving up significent portions of their income for progressive taxes; paying off their housing debt becomes the single most important priority for them. You may or may not buy that particular line of argument, but I use it to illustrate the point that economic trends can be seen as the root cause of policy cbanges.


Ed Dodson's response: Before too much time has passed, I wanted to get back to you with answers to the questions you raised concerning my paper. ...[Y]ou have rightfully put me to the teet of explaining an apparent contradiction in my conclusion that "politics dictates economics." Responding is going to require some space, but I hope what follows will provide a clear (and sound) basis for my conclusion.

First, a better term than politics is that of positive law, the distinction is one of process versus the formal representation of process. Positive law is manmade law and is itself constrained by limited sovereignties, in that no geo-political power is absolute. When I say that politics dictates economics, I am acknowledging the countless ways in which manmade law both impedes and encourages production of wealth, trade and commerce; and, after production is complete, then intervenes in the natural distribution of wealth to producers.

Second, the most serious impediment to production is monopoly privilege. In Australia and in every society with which I am aware, those who have gained a measure of control over the socio-political arrangements use that influence to enhance their own narrow self-interests. One form of monopolistic privilege is the protective tariff. Another is heavy excise taxes on goods imported from other societies. In Australia, the use of these monopolistic measures happened to have been instituted as much for the purpose of protecting wage-laborers from external competition as for the protection of the interests of industrial-landlords. For Australian wage-laborers, then, positive law was instrumental in creating a welfare state that landowners and business owners certainly would not have paid for voluntarily. These were the political prices that large-scale capital owners had to pay in order to retain a degree of monopolistic privilege in the control over Australian natural resources.

Third, once wealth is produced, governments everywhere intervene in the natural distribution ai wealth to producers (that is, to those who labor and produce/acquire capital goods). By definition, redistribution of wealth occurs after production, when claims on wealth by nonproducers are sanctioned by positive law. Titleholdings to nature (i.e., deeds) allow such claims to be made; also, licenses that limit competition sanction claims on production by those who have been granted these privileges by government, one of the most important observations John Locke was to make in the late 17th century.

Fourth, for the political economists such as Smith, Ricardo, Mill or George, an important theoretical point was that even in the absence of the State and of formal positive law, as population grew and access to land of equal quality disappeared, those who controlled land could claim a portion of production as rent. The creation of a formal State, with written laws, police powers and a military to enforce them, simply made the process easier. A society built on just principles would, however, see to it that this societally-created value in nature (or licenses) be redistributed equally to all citizens. History reveals that this principle has continuously been corrupted.

Fifth, to the extent that positive law permits private appropriation of these values, then, positive law is unjust.

Demographics and nature have been kind to the Australians. The population is relatively homogeneous, well-educated, has a strong history of participatory government and abundant natural resources to tap. And yet, from time to time even the Australians have experienced serious downturns in their economy and standard of well-being. The reasons are, I suggest, as follows (and, to a greater or less degree, apply to every society):

1. Limited sovereignty means that Australian laws reach only so far. Even internally, laws are deliberately evaded or broken by individuals who seek an outcome different from what the laws are designed to produce (noting that the breaking of unjust laws increases equality of opportunity, while the breaking of just laws has the opposite effect). Externally, other than by military force or corruption of foreign officials, Australia cannot easily force its laws on people of other sovereign nations.

2. As the global economy becomes more interdependent, those nations whose socio-political arrangement have most protected privilege and most discouraged production have found their circumstances worsening. The gap between the haves and the have nots has widened; social and political unrest has intensified. Based on the relatively high degree of equality of opportunity in Australia, one would expect to see the Australian economy bounce back rather quickly from recessions. A key reason (which also applies to the U.S. and most of the social democracies) is that the ownership of wealth and receipt of income is comparatively high.

3. One reason Australians as a whole were able to absorb the increased energy costs brought about by OPEC (a politically-created monopoly) was that so many of the nation's households owned their own homes and (like many U.S. families) had low cost fixed rate mortgage loans that became Iess and less expensive to repay as inflation cut into the purchasing power of the Australian dollar. Deficit spending by the government kept the welfare state going after raw materials prices collapsed (the collapse itself a reaction to the OPEC-induced global recession). However, a side-effect of the global recession was to make Australian commodities noncompetitive against the rockbottom priced goods coming out of Brazil, Mexico, Argentina and other debtor nations. The fear of cheap foreign imports heightened the push by business and labor For even greater protectionism. Yet, with export revenues falling and taxes already sky high, the government had itself accumulated a large debt to the international creditors. Australia's recent moves have been to devalue its currency (making its exports cheaper to foreigners) and reducing tax rates on investment and capital gains.

4. Too Much of the Wrong Kind of Redistribution. Despite Australia's tax policies that capture a fair chunk of the annual rental value of urban land, its tax system still encourages a great deal of speculation in agricultural and mineral lands. Australia still has very high tax rates on business and on capital gains, but captures very little mineral or agricultural land value. During the period of rapid commodity price increases in the late 1970s, agricultural and mineral land prices rose dramatically in Australia. Thus, when global prices began to drop those who acquired this land (particularly with borrowed funds) had their profit margins disappear and many went into bankruptcy. The same thing happened in the U.S. oil patch and to farmers in the Midwest.

The similarities between the U.S. and Australia are many but part because the U.S. dollar is the currency of international trade and debt. Thus, the value of the dollar was for a long time kept up because the LDCs needed dollar reserves in order to make interest payments to the bankers. Australia spends far less of its tax revenue on the military or on crime or on poverty than do we -- very real advantages. Now they are moving in the direction of Reaganomics -- deregulation and lower tax rates. The Australian labor force has, as in the U.S. and Europe, shifted from primary activities and heavy industry to higher tech manufacturing and service activities. With that has come a disassociation with traditional labor union objectives and disenchantment with heavy income and property taxes. The supply-side gamble has been that lower tax rates on income and investment will increase the size of the tax base (and the economy), yielding the same or more revenue to government. In the short-run, this might work for Australia, even though it has not in the deficit-prone U.S. In the long run, the gains in productivity achieved will become capitalized into higher land prices as predicted by economic theory, unless the government begins to capture something approaching the real annual rental value of all land.

These are what I see as the important ways in which positive law and politics dictates economic results. A key reason why meet economists would not see these relationships is that they think of land, labor and capital as inputs without a distinction. The early political economists started from the observation that land is not wealth but the source or wealth; which meant that wealth had to be produced from the application of labor and capital (wealth transformed into tools). Since titleholding or licenseholding are passive activities and produce nothing, they become the mechanisms by which nonproducers make their claim on production. In medieval times they called this tribute; when land came to be privately held, the political economists called it rent.

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