Unseen Assumptions in Economics

Mark Hassed

[Reprinted from Progress, July-August 2004]

To understand economics it is best to start from basics. In economics, just as in life, there are a lot of unseen assumptions we bring with us. Unless these are examined and tested then all our economic "knowledge" will be nothing but a house of cards.

An excellent analogy for this is the view of the Universe prior to Galileo. Back then it was widely believed that the Earth was the centre of the Universe. Because of this the entire science of astronomy was based on a fiction. It did not matter how much things were "studied", it is impossible to start from a fiction and arrive at the truth. Once the truth behind Galileo's ideas became accepted everything suddenly fell into place.

So, economically speaking, where are we?

Unless you are an overseas subscriber you are sitting on this vast island we call Australia. On the island there are roughly 20 million people who are as healthy, well educated and well trained as modern methods will allow. As a nation, we enjoy access to just about any natural resource imaginable. There is plenty of open space, the climate is hospitable and the infrastructure in our cities is extensive and modern. In short we have at our disposal almost every possible advantage.

The result then may to some of you be a little surprising. Recent figures from the Australian Bureau of Statistics (ABS) show that just on 40% of the population relies on some form of welfare payment. That is, around 8 million Australians are unable to provide for all their day-to-day needs.

What then is the unseen assumption that produces this result? To understand that we need to look at a concept called the "point of interaction" (POI).

There are only 2 fundamental economic factors - the natural resources (or land) and the people who provide the labour. Capital and all the man-made objects else you see around you are simply products of land and labour. When land and labour come together the laws and customs of society determine the outcome. The meeting point of land and labour is their POI.

We often overlook the factors that modify the result at the POI. Examples are such things as taxes (when government taxes something they make it harder and less desirable to do) and subsidies (when government subsidise something they make it easier and more desirable to do).

So, what is happening at the economic POI that means that around 40% of Australians cannot support themselves without government help? Put simply it all relates to our laws of property and taxation.

One of our most common unexamined assumptions is that absolute ownership of land is right and proper and that said ownership gives you the right to charge and keep a price of admission (rent). This assumption is deeply buried in our national psyche and indeed the psyches of almost all western nations.

At first glance the "right" to own land seems very obvious even inevitable. However, the flow on effect from this is that it produces a great polarity of wealth. The moment you allow absolute ownership of land without any balancing obligation the situation arises where the wealthy buy up the land and rent it to the less wealthy. The rent passing from the less-wealthy to the more-wealthy produces a growing polarity in wealth.

Does this sound a little theoretical? Let's look at 3 contemporary examples.

A few years ago while teaching economics a student in the group told me how he used to work in a low rent hotel for old men in Sydney. He noticed how every time the pension increased the rent in the hotel increased by precisely the same amount. The government was trying to help old people by increasing benefit payments and all that was happening was that it was immediately being taken back in rents.

Next, consider the tremendously popular "First Home Buyers' Scheme". The $14,000 subsidy looked certain to help poor people. The result was slightly different according to professional valuers and real estate agents. What happened was that land prices in certain areas spiked upward by $14,000 and then fell back immediately the scheme was removed leaving the people being "helped" by the scheme $14,000 under water.

Finally, consider former Prime Minister, Bob Hawke's promise that no child would live in poverty by 1990. A lovely sentiment and one to which we would all subscribe. The problem was in the method he chose to fulfil the promise - a large increase in welfare payments. The net result was an increase in rents with no reduction in poverty.

So, what's the answer?

Well without getting too long winded, it's quite simple. What's needed is the recognition that with every right comes a corresponding duty. With the right to hold a piece of land comes the duty to pay to the community the rent for that opportunity. By so doing the need for taxation and its dampening effect on thrift and industriousness would be removed.

Yes, you understood correctly. If the government instead of individuals collected the rent from land then no taxation would be necessary. By the way, this new economic system is not going to come in any time soon, so don't rush out just yet and start paying the Government rent on the land you hold.

Before you reject this out of hand remember the title of this article: "Unseen assumptions in economics". Remember that the current system of taxing thrift and industriousness instead of land rent is just an idea, an idea for which we pay dearly in economic and human terms.

Dare to look at things afresh!