Santa Cruz Indymedia :
Santa Cruz Indymedia

Commentary :: Labor & Economics

Cuckoo Economics

By failing to distinguish between assets that can be *produced* and assets that can only be *acquired*, modern economics laid the ideological foundation for unemployment, poverty, inequality, and the looming global depression.
Cuckoo Economics



Gavin R. Putland
October 19, 2005



 1.  Bird brains
 2.  True and false capital
 3.  Bait and switch
 4.  The preferred enemy
 5.  All-devouring rent
 6.  Phony proxy class warfare
 7.  ``Business'' cycles
 8.  ``Natural'' unemployment
 9.  ``Mutual'' obligation
10.  The rat race
11.  ``Free'' trade
12.  Economy without ecology
13.  The Great Depression of 2006–?
14.  The U.S. dollar bubble
15.  Axis of evil
16.  Selling America
17.  End-game
18.  The Chinese century




All capitalists are crypto-communists. Throughout the capitalist world, children in elementary schools have been taught that communism takes away the right to choose one's occupation, while students of economics have been taught that by taking ``from each according to his ability'' and giving ``to each according to his need'', communism destroys the incentives that are essential for economic progress. Yet in every capitalist country, the typical poor breadwinner has never been free to choose his occupation, but has always been obliged to accept the first offer of employment, lest he default on his rent or mortgage and be evicted from his residence. The welfare state has not abolished this obligation, for in some places the dole is cut off if the recipient rejects an offer of employment, while in others the dole is of strictly limited duration. Moreover, welfare is subject to income tests which, in combination with income taxation, leave the poor with little or no incentive to work harder or improve their skills. Meanwhile, the rich receive income and ``capital gains'' through ownership of assets that would exist with or without incentives.

All communists are crypto-capitalists. As the capitalists impoverish the proletariat through ownership of the ``means of production'', the communists impoverished entire populations by removing incentives. As every modern capitalist country runs a parallel command economy through its welfare bureaucracy, so the Soviet Union ran a parallel market economy by requiring manufacturers of armaments to bid against each other for state contracts. To the extent that the communists reduced the tyranny of the market, they replaced it with the tyranny of the state: the privilege of ownership of the means of production was not abolished, but absorbed into the privilege of membership of the political class.

In truth, as the ``inside'' and ``outside'' of a Moebius band are united by a twist in the band, so capitalism and communism are united by a twist in the economic theory to which they both subscribe.

1.  Bird brains

The history of life on earth is the history of gene wars. Individuals live and die; populations rise and fall; but hereditary traits persist, and the unit of heredity is the gene. Clearly the genes that survive longest are those that are best able to propagate themselves. To call this survival of the fittest is tautological because fitness has no moral dimension, nor any other meaning apart from ability to survive.

The European cuckoo, for example, is driven by its genes to lay its eggs in the nests of other birds. Thus it enlists the labor of other species in the propagation of its own genes. This behavior impedes the continuation of those species whose nests are used, and does not assist the continuation of the class of birds as a whole; but it assists the propagation of the cuckoo's genes, and nothing else affects the measure of ``fitness'' of those genes or of the behavior that they produce.

If birds were endowed with conscience and reason, they might think it inequitable to use other birds' labor without compensation. They might perceive that if such exploitation is permitted, it reduces the incentive to build nests and raise chicks. They might conclude that while birds will always serve their own interests, they should be made to do so in ways that add to the total welfare of birds instead of merely subtracting from the welfare of others. So, if all birds were subject to one government, would not that government make a law against laying eggs in the nests of other birds? Not if the history of human government gives any guidance!

2.  True and false capital

The assets that communists call the ``means of production'' fall into two categories:

  • Assets that taxpayers can neither create nor destroy nor move out of the taxing jurisdiction may be called land-like assets or site-like assets (where a site means a piece of ground or airspace, including any attached rights to erect buildings on that ground or into that airspace, but excluding any actual buildings).
  • The rest — that is, assets that taxpayers can move and/or destroy and/or refrain from creating — may be called (for want of a better analogy) house-like assets.

According to this terminology, house-like assets used as means of production include not only buildings and other fixed structures, but also industrial and commercial equipment of all kinds (fixed or movable) and stock in trade. The great classical economists from Adam Smith (1723–1790) to Max Hirsch (1853–1909) called such assets capital. Because the production of house-like assets adds to the total wealth of humanity, and because the profits from such assets are an incentive to produce the assets, capitalists advocate the private ownership of house-like assets and the private appropriation of profits derived therefrom.

Land-like assets include not only sites, but other natural resources (which cannot be created by human effort), statutory monopolies and limited licenses (which can be created only by governments), and the so-called natural monopolies enjoyed by providers of networked services such as electricity, gas, water, railways, and (at the time of writing) telecommunications [1]. Returns on land-like assets, net of the demands of labor and capital, are known as economic rent [2]. The owners of such assets constitute the rentier class. From the viewpoint of taxpayers, land-like assets cannot be produced, but can only be acquired. Such acquisitions do not add to the total assets of humanity. Furthermore, while the returns on labor and capital applied to a land-like asset are incentives to apply that labor and capital, the return on the asset itself (net of the demands of labor and capital) is not an incentive to do anything except acquire the asset; indeed, the party acquiring the asset need not be the one applying the labor or capital. Therefore the argument by which capitalists justify the private ownership of house-like assets and the private appropriation of the returns on house-like assets is not applicable to land-like assets. But they apply it anyway!

3.  Bait and switch

Because economic rent is not an incentive to do anything productive, economic rent can be taxed at high rates (up to 100 percent) without discouraging any form of industry, and consequently without restricting the supply or raising the price (or hire or rent) of any product or asset. Hence the burden of such taxation cannot be shifted through the price mechanism, but is borne entirely by the asset owner as the asset owner. The great classical economists understood this.

However, because land-like assets by definition are protected from competition, the returns thereon are high and increase in line with economic growth, giving the owners both the motive and the means to fight for the retention of ``their'' economic rents. They were not in any danger of losing the fight until the last two decades of the 19th century, when the argument for the taxation of economic rent reached its zenith in the writings of the American classical economist Henry George (1839–1897), who advocated the public appropriation of the entire rental value of land in lieu of taxes on labor and capital; this proposal became known as the single tax. But by that time, rentiers were well represented on the trustee boards of certain prestigious American universities, whose endowments, moreover, consisted chiefly of land grants. Economics was just then becoming established as a separate academic discipline. And there was no academic tenure: professors who did not do the bidding of their paymasters could be fired without process or redress.

So the language of economics was corrupted so as to conflate land with capital, economic rent with profit, and acquisition with production, in order to obscure the advantages of a peculiar tax on land-like assets [3]. As the unit of heredity is the selfish gene, which is no less ``fit'' if it propagates purely at the expense of other genes, so the unit of economic analysis became the selfish entity (individual or firm), which was no less praiseworthy if it prospered purely at the expense of other entities. The fallacy of composition — that what is good for the part is good for the whole — became an axiom whenever the part in question was a rentier. It was as if the cuckoos, being relieved of the burden of building nests and raising chicks, had used their discretionary time to convince other birds that any restriction on the laying of eggs in other birds' nests would discourage the building of nests!

By calling itself neo-classical economics, the new pseudo-science masqueraded as the successor, though in fact it was the usurper, of the classical tradition. Within a generation it became the new orthodoxy. The real heirs of Adam Smith — those who still distinguished between capital and land — were relegated to the fringe as mere ``Georgists''.

4.  The preferred enemy

The obvious winners under the neo-classical paradigm were the rentiers; for if land-like assets were capital, then capitalism, which rightly demanded private ownership of capital and private enjoyment of profit as incentives to create wealth, implicitly also demanded private ownership of land-like assets and private appropriation of economic rent. The other winners, whether by accident or by design, were the communists. For if land was nothing but capital, then communism, which began by demanding expropriation of land, was also obliged in the name of ``consistency'' to demand expropriation of capital, enabling the revolutionaries to eschew intellectual distinctions between categories of assets and stir up the masses by appealing to crude envy. The conflation of land with capital did not precede these developments in capitalism and communism; but it offered a false conceptual framework that was willingly adopted by both rentiers and communists to entrench their respective positions.

Against whom? Against the Georgists, whom each side feared more than it feared the other! For the rentiers, the communists threatened to turn workers alone against owners of capital and land, whereas the Georgists saw workers and owners of capital as natural allies and threatened to turn both against owners of land. For the communists, the rentiers were supposedly being eclipsed by the ``bourgeoisie''; moreover, to accept private ownership of some means of production but not others, as the Georgists did, would hobble the revolution by diluting the propaganda of envy. So the capitalists either ignored the Georgists or denounced them as communists, while the communists either ignored the Georgists or denounced them as capitalists. This reciprocal strategy protected both capitalist and communist regimes by directing public attention away from Georgism and towards a more extreme, and therefore less attractive, brand of reform. It also ensured that wherever capitalism collapsed, it would be replaced not by Georgism, but by rampant communism, and that wherever communism collapsed, it would be replaced not by Georgism, but by rampant capitalism.

5.  All-devouring rent

Every tradeable asset has a capitalized value (or lump-sum value) and an annualized value (or ``rental'' value). One of these values is fundamental and the other is derived therefrom. But which one is fundamental depends on whether the asset is house-like or land-like.

The capitalized value of a house-like asset is determined by its current cost of production, and is its fundamental value, while the annualized value is derived by spreading the capitalized value and interest thereon over the remaining service life. Any fall in the cost of production would induce more production of competing assets, and the ensuing increase in competition would reduce the annual return, whereas any rise in the cost of production would deter replacement of competing assets, and the ensuing reduction in competition would increase the annual return. In short, the rate of asset production adjusts itself so that the annual return is apportioned to the cost of production.

This mechanism does not work for a land-like asset, because there is no production, or no competition in production, of such assets. So the rental value of a land-like asset is its fundamental value, while the capitalized value (in a rational market) is the discounted present value of the future rent stream. (That is, the capitalized value is the lump sum that would yield an interest stream equal to the rent for the same risk, or the sum of the future rental payments individually discounted for time and risk.)

But the neo-classicists, always eager to confuse capital and land, put the effect before the cause, sometimes treating the capitalized value of a house-like asset as the present value of its annual return, and sometimes treating the rental value of a land-like asset as the interest on its capitalized value. (The latter fallacy also finds expression in the anarchist theory that if one could somehow abolish interest, one would thereby abolish rent.)

If rent of a land-like asset is not interest, what is it? The asset may have an intrinsic value, such as the fertility of a plot of land (``natural rent''). And it may have a community-created value, such as the proximity of that land to supplies and markets (``locational rent''). But, whatever these values may be, no rational person will pay rent for the use of an asset if an equally desirable substitute can be had for no rent. Hence, if any land-like assets of a particular class remain unclaimed, the rent that can be charged for a particular specimen only reflects its superiority over the best unclaimed specimen; this is the so-called Ricardian constraint. If all specimens are claimed, then ``the best unclaimed specimen'' means not using any assets of that class. If the use of such assets is essential, the rent will be all-devouring, meaning that the after-rent returns to the users of the assets will be competed down to a bare minimum.

The most obvious land-like asset class whose rent is all-devouring is land itself. No worker can live, and no enterprise can trade, without occupying space on the surface of the earth. Yet all the usable space is owned. So the rent or price of land is competed upward, and the returns to labor and capital are consequently competed downward, until the returns to labor (net of the rent or price of residential land) are reduced to the minimum for which workers will consent to acquire skills, work, and raise the next generation of workers, while the returns to capital (net of the rent or price of commercial land) are reduced to the minimum for which the financiers will consent to save and invest. Every attempt to improve the condition of the working class or the employing class is competed away in the land market, so that the ultimate benefit accrues not to the nominal recipient, but to the cuckoo in the nest: the land-owning class.

That is why the ever-increasing sums handed out in wages, welfare, charity, and industry assistance never seem to be enough. But because the real reason is not widely understood, the rentiers and their economists can easily blame the nominal recipients for allegedly squandering the assistance that society so generously gives them. It is as if the cuckoos, having laid their eggs in other birds' nests and taxed all the birds to help feed the cuckoo chicks, explained the host birds' lack of reproductive success by accusing them of wasting the food!

The plight of non-rentiers is compounded by speculation. House-like assets tend to depreciate in real terms because of wear and tear and obsolescence; moreover, any protracted appreciation of house-like assets would induce additional production, which in turn would counteract the rise in prices. But for land-like assets, such ``additional production'' is not possible. Meanwhile, the effective demand for land-like assets tends to increase due to population growth (which leaves fewer unclaimed assets and increases competition for use or acquisition of claimed assets), economic growth (which increases capacity to pay for the assets), and improvements in technological infrastructure (which increases the amenity of certain types of assets, especially land). So land-like assets tend to appreciate in real terms. This causes speculative demand for land-like assets as individuals and corporations buy assets in the hope of reselling them for higher prices, or try to save money by early acquisition of assets that they intend to use later. The speculative motive raises prices because all buyers must compete with the speculators. Worse, assets held by speculators are likely to be unused or underused because the owners are not yet ready to use them, or because the owners wish to avoid commitments that would fetter their ability to sell at the most opportune times. Thus speculation leaves less desirable ``best unclaimed specimens'' or, if all specimens are claimed, restricts the uses to which assets can be put. These effects raise not only prices, but also rents, as not only buyers but also renters must compete with the speculators [4].

A sufficiently heavy tax on the holding of land-like assets, calculated as a certain percentage of the capitalized value per year, requires the owners to use the assets efficiently in order to generate sufficient income to defray the tax. Such a tax does not prevent the assets from being bought and sold for ``capital gains'', and therefore does not entirely eliminate the speculative motive; but it eliminates the price and rent premiums caused by the non-use and under-use of speculatively held assets.

Rentiers and their economists agree that such a tax is a bad idea, especially when imposed on speculators' land. But they disagree as to the reasons. Some, who seem never to have looked out the window of a bus or train, flatly deny that the culture of speculation leads to non-use or under-use of land. Others pretend that such non-use or under-use is socially desirable in that it prevents any initial use that would interfere with conversion to a higher use at the optimal time, as if the initial use were not desirable in itself, and as if the higher use would not interfere with conversion to a still higher use at a still later time — yea, as if the cuckoos were helping other birds by giving them time to become better parents!

6.  Phony proxy class warfare

In consequence of the all-devouring rent effect, the benefits to workers from wage increases and personal tax cuts are competed away in prices and rents of residential land, while the benefits to employers from wage restraint and corporate tax cuts are competed away in higher rents and prices of commercial land. So the perpetual class war between workers and bosses is in reality a proxy war between residential and commercial landowners. To the rentier with a diversified portfolio including both residential and commercial property, the outcome of this war is a matter of indifference.

The one benefit that cannot be competed away in the land market is a reduction in the intensity of competition in the land market! This can be achieved by imposing a holding tax on land-like assets, making it uneconomic to hold such assets for speculation alone, forcing speculatively held assets into use, eliminating the price premiums and rent premiums caused by non-use or under-use of such assets, and forcing investors to consider the tax implications before they bid up prices. But that is precisely what the neo-classicists will not admit.

7.  ``Business'' cycles

In a rational market, the capitalized value of a land-like asset is the discounted present value of the future rent stream. But the market is not always rational. When assets of a certain type are conspicuously appreciating, people want to ``get on the escalator'' by buying some of those assets. In so doing, they accelerate the rise in prices, inducing more people to buy the assets, and so on, causing a speculative bubble — that is, a state in which prices are decoupled from rents and are supported solely by the circular argument that prices will continue to rise. Eventually the illusion becomes unsustainable and the price rise slows down, which takes away the alleged justification for current prices, and so on, until prices dive back to earth: the bubble ``bursts''. But eventually the natural appreciation of land-like assets leads to a new bubble in the same asset class. So the market for any land-like asset class is cyclic.

A bursting bubble in a particular asset market has two counteracting effects. On the one hand, it drives investors away from that asset class and, by default, towards some other asset class that may also be susceptible to bubbles. On the other hand, those who have invested heavily in the collapsed market have to reduce their expenditure, and some become insolvent. As one agent's expenditure is another's income, and as one agent's debt is another's asset, a chain reaction ensues, reducing the funds available for investment in other asset markets, possibly causing them to collapse, and so on; these are the ingredients of a recession. After an isolated bubble-burst, the former effect tends to dominate; thus the land burst of the mid 1920s led to the stock bubble of the late 1920s, and the stock crash of 1987 led to a land bubble, and the ``dotcom'' crash of 2000 encouraged a ``housing'' bubble (a residential land bubble). But after a second burst in quick succession, the cumulative belt-tightening and bad debt tend to cause a recession; thus the stock crash of 1929 led to the Great Depression, and the land burst of 1989 led to the recession of 1990–91.

In general, a burst in one asset market interferes with the cycles of other markets, sometimes pushing them out of synchronism by encouraging bubbles, and sometimes drawing them into synchronism by triggering bursts. This mutual interference, complicated by external shocks, makes it difficult to discern the autonomous cycles of some asset classes and causes irregularities in cycles that are more easily discerned. Therefore economic forecasts should always be based on underlying dynamics, not extrapolation of cycles. That said, it is clear that residential land has a cycle of roughly 9 years and that commercial land has a cycle of roughly 18 years. In both cases, peaks in land prices coincide with peaks in building activity as investors try to justify the exorbitant prices paid for sites. The stock market is harder to characterize because the assets backing shares are diverse and not all land-like; however, because the production of house-like assets is slow compared with the trading of shares, the share market is land-like in the short term. Because the money supply is controlled directly or indirectly by government, money is a land-like asset, and the value of money as measured in goods and services is susceptible to bubbles and bursts — that is, episodes of deflation and inflation, respectively. Some observers claim that there is a discernible ``money cycle'' (or ``inflation cycle'') of roughly 30 years, in which case the so-called longwave cycle or Kondratieff cycle may be understood as an approximate lowest common multiple: three commercial land cycles or two money cycles. Other observers suggest that the longwave cycle itself is the money cycle. Still others claim that the longwave cycle is a fluke or an illusion. But the residential and commercial land cycles are clearly real.

It is also clear that bursts in the residential and commercial land markets are correlated with recessions; in particular, the global recessions of 1974–5, 1981–2, and 1990–91 were heralded by bursting property bubbles.

Neo-classical economists offer numerous contradictory theories on the cause of periodic recessions. The one point on which they are unanimous is that the cause is not speculation on land-like assets, or if it is, a holding tax on such assets would not help. The theory that recessions are due to high oil prices is popular with politicians needing excuses for their failures, but is less popular with economists for at least three reasons: first, there were recessions before there were oil shocks; second, the recession of 1990–91 started before the oil shock that allegedly caused it; third, in the words of the Chairman of the U.S. Federal Reserve, ``we create these elaborate models for policy responses and we put in oil prices [but] they don't create a recession in the models'' [5].

8.  ``Natural'' unemployment

To ``save'' labor is get more output for each unit of labor — in other words, to increase the power of labor. Technology has increased the power of labor not by a few percent, but by multiples ranging from dozens to billions. So if unemployment were simply caused by ``labor-saving'' technology, the unemployment rate would not be 5 percent or 15 percent, but more like 99 percent. In reality, as people always have unsatisfied wants that can be satisfied only by the results of labor, the use of technology should increase the quantity, quality and variety of production rather than reduce the overall demand for labor. The digital revolution brought out the incorrigible doomsayers predicting the end of work for the masses. So too did the industrial revolution and the agrarian revolution. But amid all these upheavals the average unemployment rate through the ``business cycle'' has remained remarkably steady. Therefore the cause of unemployment is to be found not in what has changed, but in what has stayed the same.

What has stayed the same is the political influence of the rentier class, which prevents heavy taxation of economic rent and compels governments, by default, to impose punitive taxes on everything that capitalists profess to encourage — such as work, investment, employment, and the consumption that sustains demand. All these taxes socialize the fruits of individual effort as communists recommend! They also increase the cost of hiring a worker at a given standard of living, and consequently tend to increase inflation or unemployment or both. Central banks fight the inflationary tendency by raising interest rates (or otherwise restricting credit) to discourage hiring and consumption, causing yet more unemployment, in order to maintain unemployment at the so-called natural rate, which the neo-classicists define as the minimum unemployment rate that causes sufficient downward pressure on wages to yield stable inflation. The myth that unemployment is caused by ``labor-saving'' technology provides a smokescreen for this policy.

Thus, for the neo-classicists, unemployment is not an evil to be avoided, but the price of ensuring that rentiers can enjoy their economic rents with minimal interference from the tax authorities. The resulting unemployment rate is accepted as ``natural''.

9.  ``Mutual'' obligation

The need for a certain rate of unemployment obviously cannot be admitted by politicians, who must always pretend to desire full employment, and who will be judged on their success in reducing unemployment during their terms of office. Given that the central bank will maintain unemployment at the natural rate, the actual rate cannot be reduced except by reducing the natural rate. And if, due to opposition from the rentier class, the natural rate cannot be reduced by shifting the tax burden onto economic rent, the only remaining method is to make life more difficult for the unemployed, increasing the desperation of the unemployed to get jobs and of the employed to keep them, so that the same downward pressure on wages can be obtained with a smaller number of unemployed. Having a smaller number of more desperate unemployed does not reduce the overall severity of the problem, but makes the statistics look better.

This mechanism explains several observations that are otherwise inexplicable:

Q(uestion). As some recipients of unemployment benefits are honestly seeking jobs while others are not, why are the latter compelled to seek jobs in competition with the former, so that the honest job-seekers have less chance of success?

A(nswer). Because those who are not genuinely seeking jobs are not contributing to the required downward pressure on wages. Justice for honest job-seekers is not the aim.

Q. As there are more job-seekers than available jobs, why do some jurisdictions require each job-seeker to submit a certain quota of applications per week, notwithstanding that the advantage of his/her increased activity is canceled by the increased activity of his/her competitors?

A. Because the unemployed must be made to work as hard as possible, in order to maximize their desperation to find jobs and the desperation of the employed not to lose them. Helping the unemployed to find jobs is not the aim.

Q. If the government can find projects on which unemployed people can ``work for the dole'' at standard rates of pay, why can't the government run those projects as an ordinary employer and hire the same people as ordinary part-time workers?

A. Because ordinary part-time workers are not compelled to seek additional employment on pain of losing their wages, whereas participants in ``work for the dole'' are required to seek additional employment on pain of losing the dole, thus maintaining the downward pressure on wages. If unemployed people were simply employed part-time by the government, they would cease to be unemployed, so that the unemployment rate would fall below the natural rate. That is not the aim!

Q. But why should I, as a voter, support a policy that deliberately intensifies the competition for jobs, making it harder for my kids to get jobs and more likely that someone else will take my job?

A. Because you, as a mere voter, are not supposed to think things through like that!

So the ``unemployed'' are actually professional inflation-fighters, and the ``dole'' that they receive is actually the wages of their anti-inflationary labor. The neo-classicists call this policy mutual obligation, piously declaring that if the state is obliged to provide unemployment benefits, the recipients are obliged to seek jobs. These pronouncements play to two audiences: to the bleeding-hearts by professing a desire to help the unemployed into the workforce, and to the rednecks by leaving open the suspicion that unemployment — the deliberate creation of neo-classical policy — is somehow the fault of the unemployed.

At this point it may be instructive to note that the closest human analog of the cuckoo is the man whose illegitimate children are supported by the husband of his mistress. Etymologically, ``cuckoo'' and ``cuckold'' ought to be synonymous. Yet it is the husband of the adulteress, not her partner in adultery, who is called the cuckold!

10.  The rat race

Seeing that unemployment weakens the bargaining position of workers, the ignorant (including the communists) conclude that it helps employers. But employers know that they hire when business is good and fire when it is bad. They know that higher unemployment means a bigger flood of applications for every advertised vacancy and a higher risk of being sued by at least one unsuccessful applicant. They know that anyone who must be fired at a time of higher unemployment will be less likely to find other employment and therefore more likely to sue. They know that job shortages force the unemployed to start businesses in competition with employers, some of whom will then be forced into alternative lines of business, where they will increase the competitive pressure on other employers, and so on.

In short, the unemployment rate sets a benchmark level of desperation that propagates through the entire economy, affecting workers and bosses alike. Only rentiers escape. Therefore everyone wants to be a rentier, and the resulting competition for land-like assets makes it harder to become a rentier!

11.  ``Free'' trade

An income tax of (say) 30 percent applies to income from exports and therefore raises export prices as if it were a tariff of 30 percent in every country of destination. But when politicians complain of the tariff barriers erected by other countries, they never mention domestic income taxes. Similarly, a value-added tax (VAT) or goods-and-services tax (GST) of 10 percent applies to imports and therefore raises their prices as if it were a tariff of 10 percent. While VAT/GST is not levied on exports in the country of origin — because it is levied in the country of consumption, regardless of origin — the prices of those exports are still inflated by compliance costs and by the influence of the tax on the cost of living, hence wages.

The neo-classicists maintain that such taxes are perfectly compatible with ``free'' trade because they are ``non-discriminatory'' between domestic and international transactions. Of course exports and import replacements embody more domestic transactions than imports do, so that ``non-discriminatory'' taxes on transactions raise prices of exports and import replacements more than they raise prices of imports. But the neo-classicists are not dissuaded by this. Neither are they troubled by the implication that, as long as taxation is ``non-discriminatory'' by their definition, trade can be taxed to the point of prohibition and still be considered free!

In fact, all taxes on house-like assets impede trade and raise prices by discouraging the production of such assets, while all transaction taxes impede trade and raise prices by discouraging transactions. The only taxes that do not impede trade or raise prices are holding taxes on land-like assets. By raising more of its public revenue from taxes of this kind, and less from other kinds, a country can make itself more competitive. This of course would compel other countries to do likewise. Hence the rentier class and its economists are constantly on guard to ensure that no country is the first to take this step; they know that the price of freedom (from the need to work for a living) is eternal vigilance.

12.  Economy without ecology

Reliance on interest rates as an anti-inflationary measure causes artificially high long-term-average interest rates, hence artificially high discounting rates in the assessment of future costs, including the costs of resource depletion and environmental damage. So corporations and governments treat natural resources as if they were inexhaustible, and the ecosphere as if it were indestructible, because their calculations show that it is ``uneconomic'' to face the facts.

13.  The Great Depression of 2006–?

The last three global recessions of the 20th century were announced by bursting ``property'' bubbles (i.e. land bubbles). The first years of the 21st century were marked by a global property bubble. The inevitable burst began in Australia in early 2004 (long overdue according to the ``9-year'' cycle). It has spread to the British Isles and Europe, and in due course must reach the United States. The interval between the dotcom crash and the property burst was similar to that between the land burst of the mid 1920s and the stock crash of 1929. So the historical precedents indicate that a recession will hit Australia by the end of 2005 and spread globally through 2006.

The property burst now in progress was ``overdue'' because the growth of the bubble was accelerated and prolonged by three factors: (i) a flight of money from shares to property following the dotcom crash, (ii) tax cuts ostensibly designed to encourage capital formation — but, as always, failing to distinguish between capital and land — and (iii) the exclusion of land prices and/or mortgage interest from the measure of inflation for the purpose of setting official interest rates. Consequently the latest property bubble, although confined to ``housing'' (i.e. residential land), was the biggest asset bubble in history when measured in terms of the combined GDPs of the affected countries [6]. That is a conservative measure in view of the number and economic weight of the countries involved. The bigger the bubble, the bigger the burst. The bigger the burst, the bigger the recession.

But, as we shall see, even that is understating the problem.

14.  The U.S. dollar bubble

As the money supply is controlled directly or indirectly by government, money is a land-like asset and a component of the so-called interest of money is economic rent (wherefore some Georgists argue that economic rent should be equated with usury). This economic rent accrues to those who merely possess money. What of those who also create it?

If a government creates money and spends it, increasing the supply of money relative to the supply of goods and services, then the value of money in terms of goods and services is reduced; that is, prices rise. Thus the people's earnings and savings are devalued while the government gets what it wants. As Milton Friedman famously put it, ``Inflation is the one form of taxation that can be imposed without legislation.'' But the strategy does not have to be pursued so far as to cause inflation. If the government creates money at such a rate that the growth in the money supply only keeps pace with the growth in supplies of goods and services, then the government can run a deficit (albeit a small one) without inflation. In this case the government reaps the benefit of increasing demand for its currency.

Similar arguments apply if, instead of a government creating money for a country, we have a country creating money for the world. For more than half a century, the U.S. dollar has been the de facto world currency — the preferred currency for international trade and national currency reserves, and the exclusive currency for loans from the International Monetary Fund (IMF). Importers need reserves of dollars to pay their suppliers. Central banks need reserves of dollars to protect their currencies. Poor countries must borrow dollars to get capital, and must earn dollars to service their debts. Hence the growth in international trade causes growth in the global demand for U.S. dollars, allowing the U.S. to export dollars — which cost nothing to produce — and receive real goods and services in return. That is how the U.S. manages to import 50 percent more goods and services than it exports. When the exported dollars are invested, they can be invested only in U.S. assets, creating a demand for U.S. Treasury Bills without high interest rates, and inflating the price/earnings ratios of U.S. property, stocks, and bonds. This inflow of investment creates a surplus on the capital account, which balances the deficit on the current account (including imports, exports, interest, rent, and dividends).

The U.S. dollar is also the dominant currency — and until November 2000 was the exclusive currency — for international trading in oil. Therefore any increase in the global demand for oil or the price of oil causes a corresponding increase in global demand for the U.S. dollar and boosts its value, protecting the U.S. economy against the inflationary effect of higher global oil prices and allowing the U.S. to increase its trade deficit. Hence the reinvestment of exported dollars in U.S. assets is sometimes called recycling of petrodollars.

While recycling of petrodollars allows the U.S. to finance its trade deficit without high interest rates, it also means that the value of the dollar is out of proportion to its earning capacity (interest on dollars, or yields on other dollar-denominated assets). That is one characteristic of a bubble.

Before World War II, when the U.S. dominated global oil production, trading oil for dollars was natural. It continued to make sense after the war because oil exporters wanted dollars for numerous other purposes. But after 1971, when the U.S. dollar ceased to be backed by gold, the dollar's position as the world currency became increasingly dependent on its use in the oil trade, so that the argument supporting the dollar became circular: dollars would buy oil because oil exporters would accept dollars because dollars would buy other products because exporters of other products would accept dollars because dollars would buy oil! Valuation by circular argument is another characteristic of a bubble.

The circular argument might have been enough in the absence of a credible alternative to the dollar. But if a new common currency were adopted by a market comparable in size to the U.S., with a better external trade balance and generally higher returns on investment than the U.S., the position of the dollar would become precarious, and any bad news on the dollar or the U.S. economy could provoke traders and central banks to dump the dollar for the new currency. Such a ``new common currency'' has existed since 1999; it's called the euro.

Adoption of the euro as the new de facto world currency would leave the U.S. with a stark choice: either accept a massive devaluation of the dollar, causing highly inflationary increases in the dollar prices of imported goods and services, including oil, or raise interest rates to attract foreign investment to replace the recycled petrodollars. Either option would greatly reduce the values of rentiers' assets — the former because foreign buyers would lose interest in U.S. assets, the latter because future rent streams would be discounted by higher interest rates. Moreover, even the former option would force higher market interest rates through devalued bills and bonds, devalued collateral (hence higher risk), and the need to fight inflation in goods and services.

Other countries with trade deficits would have to match U.S. interest rates in order to compete with the U.S. for foreign investment; these countries notably include Britain and Australia. Voters with home mortgages punish any government that allows interest rates to rise, especially if their debts are inflated because they bought during a recent bubble. Rentiers punish any government whose policies devalue land-like assets, as high interest rates are wont to do.

15.  Axis of evil

Iraq began selling oil for euros instead of dollars in November 2000, and then converted its entire $10 billion ``oil for food'' reserve fund from dollars to euros. The U.S., assisted by Britain and Australia, invaded Iraq in March, 2003. On June 5, 2003, the Financial Times reported that Iraqi oil exports had resumed — denominated in U.S. dollars [7].

Iran has expressed interest in the euro since 1999, and had converted most of its currency reserves to euros by late 2002. In January 2002, George W. Bush named Iran in his ``axis of evil'', provoking a wave of anti-American demonstrations reminiscent of the Khomeini era, and rallying support for hard-line candidates in subsequent Iranian elections — an inexplicably stupid move unless the Bush administration had some unstated reason for wanting to see hard-liners in power. In 2003, Iran began accepting payment in euros for oil exports to Europe and Asia. The invoicing, as opposed to the actual payment, was still in U.S. dollars. But in mid 2004, Iran announced that it would establish an international oil bourse (exchange) denominated in euros, which would create a new euro-denominated price marker alongside the familiar dollar-denominated markers. The bourse was originally due to start trading in March 2005, but the schedule subsequently slipped by one year [8].

Variations in the exchange rate between the dollar and the euro can be correlated with the above events [9].

North Korea, the other member of Bush's ``axis'', began using euros for international trade in December 2002. But, in view of North Korea's minuscule share of world trade, its choice of currency is insignificant.

Venezuela is a different matter. In September 2000, Venezuela's President Hugo Chavez delivered a report to the OPEC summit in Caracas, recommending that OPEC set up a computerized barter system so that member states could sell oil for goods and services instead of dollars. The beneficiaries would include customer states which, due to poverty and debt, had difficulty accumulating foreign exchange. Venezuela promptly entered into barter agreements with 13 other Latin-American countries. In April 2002, editorials in the U.S. media welcomed news of a coup against Chavez, but the coup collapsed after two days [10,11]. On September 30, 2005, the Associated Press reported that Venezuela had ``moved its central bank foreign reserves out of U.S. banks, liquidated its investments in U.S. Treasury securities and placed the funds in Europe.'' This decision had been made in mid 2005. Venezuela's foreign currency reserves amounted to slightly over $30 billion, of which about $20 billion had been converted to euros by early October [12].

But while American military force might persuade Iraq, Iran, and Venezuela to sell oil for dollars, Russia and Norway would be more problematic. Besides, the dollar has other difficulties.

16.  Selling America

Nearly all of what passes for ``foreign investment'' in the U.S. is simply foreign acquisition of existing U.S. assets. Hardly any of it is invested in new capacity to produce tradeable goods and services; that sort of investment would be pointless because the over-valued U.S. dollar would make the products uncompetitive. For the same reason, established U.S. corporations have been outsourcing their manufacturing to China and their customer service to India. So ``foreign investment'' simply drives up prices of U.S. assets (especially land-like assets) for the benefit of incumbent owners and to the detriment of those who aspire to be owners, while American jobs and know-how are transferred to newly industrialized countries. The U.S. economy is being gutted, hollowed out, reduced to a financial shell and an isolated military-industrial complex.

This process has five notable consequences. First, the recycling of petrodollars is not simply a case of the U.S. exploiting the rest of the world, but also a case of the owners of U.S. assets — including foreign owners — growing rich at the expense of American producers and American workers. Second, the U.S. trade deficit widens as U.S. consumers become increasingly dependent on foreign-made goods. Third, the U.S. budget deficit widens as U.S. corporations and their employees pay more and more of their taxes to foreign governments. Fourth, the value of the U.S. dollar depends more and more on the fact that dollars can buy oil. Fifth, there is less and less justification for that fact.

17.  End-game

Given that the value of the U.S. dollar must fall, nobody wants to be the last sucker holding dollars. Therefore any perception that the crash is imminent will trigger selling of dollars in an effort to pre-empt the crash. That selling will amplify the perception, causing more selling, and so on; so the perception will become reality. Moreover, the rush to sell dollars will extend to dollar-denominated assets, including U.S. property, stocks, bonds, and bills. So the burst of the dollar bubble may be the trigger for the expected burst of the U.S. property bubble — among other things.

If, on the contrary, the U.S. property bubble bursts of its own accord, the falling value of this class of dollar-denominated assets will reduce the attractiveness of holding dollars. Worse, the recession precipitated by the property burst will bring down other dollar-denominated asset markets. If the initial collapse of the U.S. property market is not enough to prick the dollar bubble, the ensuing collapse of other dollar-denominated asset markets will certainly be enough, and the dollar crash in turn will drive further selling of dollar-denominated assets.

In either case, there will be a multiple burst involving not only the global property bubble, which is already deflating outside the U.S., but also the U.S. dollar bubble and every other asset bubble that has been pumped up by recycled petrodollars. That is why the size of the global property bubble understates the problem.

Whether the dollar crash precedes or follows the U.S. property crash may depend on when the next major oil exporter demands payment in euros. It may also depend on China. The two biggest holders of U.S. currency reserves, namely Japan and China, are obviously in no hurry to devalue their reserves. But neither do they want to be caught with large holdings that have been devalued by some other cause. Moreover, apart from the risk of being caught with too many devalued dollars and too few revalued euros, China has little to fear from the fall in the dollar and the corresponding rise in the euro. It is often said that China wants a strong U.S. dollar to preserve the U.S. market for Chinese manufactured goods; but the European Union is quite capable of replacing the U.S. as China's ``consumer of last resort'', especially after the rise in the euro makes Chinese goods more competitive on the European market. It might also be said that China fears the economic slump that would follow a collapse in the dollar; but that, as we have seen, must happen sooner or later. So it would make sense for China to build up its euro holdings as far as it can without frightening the market, and then suddenly sell its remaining dollars for euros, thereby triggering the dollar crash at a time of its own choosing while minimizing the damage to itself. The euro will then establish itself as the new de facto world currency and, in the process of time, the European economies will be hollowed out as the U.S. economy was.

But if nothing else happens first, the inevitable burst of the U.S. property market will bring on the next global depression.

18.  The Chinese century

In summary, the neo-classical economy works like this. The supplies of certain assets, including land, are not within the control of taxpayers. The returns on such assets (economic rent) are not due to any activity of the owners (rentiers) and therefore could be used for public revenue with no ill effects. But this is deemed to be unacceptable. So governments impose taxes penalizing everything that the neo-classicists profess to encourage. These taxes deter employment and feed inflation. Central banks fight the inflation by raising interest rates, causing more unemployment, for which politicians blame the unemployed, who are systematically harassed in order to maximize their desperation to find jobs; this stratagem maximizes the anti-inflationary effect of a given unemployment rate and therefore minimizes the visible unemployment rate required for stable inflation (subject to the sacredness of privatized economic rent). Meanwhile, the opportunity to speculate on land-like assets creates a permanent artificial demand for those assets, causing permanent price premiums and rent premiums exacerbated by periodic speculative bubbles, which burst causing periodic recessions. One of these overpriced land-like asset classes is residential land, for which working people must pay out of wages that have been depressed by the deliberately engineered scarcity of jobs, eroded by income tax, and devalued by indirect taxes. Unemployment, poverty, and housing stress are the price that must be paid so that rentiers can continue to enjoy the economic rent that they do not produce. This is the prize for which the Cold War was fought, the End of History, the capitalist Nirvana.

But it will not always be the pax Americana. As the return to land-like assets is not nationalized, but privatized, so the privilege of creating money is not globalized, but nationalized. However, because exporters want to be paid in a currency that they can spend, the world tends to adopt one country's money as the de facto international currency. The rentiers in that country get a double windfall: the purchasing power of their money on the global market is maximized, while the recycling of that money inflates the values of their assets even by domestic standards. Meanwhile, that country's tradeable goods and services can no longer compete on price alone. So productive industries move offshore — slowly at first, but faster as the offshore competitors gain experience and expertise. Eventually the hollowing-out of that country's economy leads to a collapse of its currency and of every asset market denominated therein, precipitating a global depression, after which it becomes apparent that the center of global power has moved.


[1] A networked service is a monopoly in the sense that any new competitor wishing to serve its first customer must either replicate the whole network, which is prohibitively expensive, or connect to the existing network on terms dictated by the owner or governed by regulation; none of these options admits free and fair competition.

[2] The so-called ``rent'' of real property comprises the rent of the land plus the hire of any building(s) attached to the land; only the former is economic rent. The so-called ``rent'' of a vehicle is not economic rent, but a return on capital.

[3] M. Gaffney, ``Neo-classical Economics as a Stratagem against Henry George'', in M. Gaffney, F. Harrison, and K. Feder, The Corruption of Economics (London: Shepheard-Walwyn, 1994; 271pp.).

[4] The foregoing concepts are applicable to other land-like asset classes. For example, patents are land-like assets because they confer monopolies — in particular, monopolies on inventions. An invention has an intrinsic value, and as other people create demand for it they give it a community-created value. But neither value is realizable as a separate cash flow (licensing fees) until someone successfully claims the invention (i.e. patents it). Even then, people will pay for the patented idea only in proportion to its superiority over the best unpatented one (the Ricardian constraint). Large firms try to push back the Ricardian boundary by making excessively broad claims, by patenting numerous small variations on their own and other inventors' ideas, and by claiming ideas that are obvious or already in the public domain. The more they succeed with such tactics (commonly called ``land grabs''!), the more patent-licensing fees resemble all-devouring rents. Firms can patent ideas without using them (yet), further restricting the range of unpatented ideas and adding a speculative component to the licensing fees for ideas that are actually in use. The result of all these ``incentives'' is that far more inventive genius is expended on patent claims than on actual inventions.

[5] Alan Greenspan, questioned via telecommunication by the International Monetary Conference (London, June 8, 2004); transcript by Ashley Seager quoted in Fred Harrison, Boom Bust (London: Shepheard-Walwyn, 2005), p.65.

[6] The Economist, June 16, 2005;,

[7] William Clark et al., ``U.S. Dollar vs. the Euro: Another Reason for the Invasion of Iraq'', Project Censored, #19 for 2002–3,; 5 refs.

[8] William Clark et al., ``Iran's New Oil Trade System Challenges U.S. Currency '', Project Censored, #9 for 2004–5,; 5 refs.

[9] Cóilín Nunan, ``Petrodollar or Petroeuro? A new source of global conflict'', Feasta Review, No.2,; 32 refs.

[10] Hazel Henderson, ``Globocop v. Venezuela's Chavez: Oil, Globalization and Competing Visions of Development'', April 2002,

[11] Duncan Campbell et al., ``Bush Administration Behind Failed Military Coup in Venezuela'', Project Censored, #12 for 2002–3,

[12] Gregory Wilpert, ``Venezuela's Central Bank Confirms it Deposited $20 Billion in Swiss Bank'',, October 5, 2005,; republished by, October 7, 2005,

Copyright © 2005 Prosper Australia (, Author: Gavin R. Putland ( Permission is given to forward, copy, translate, and otherwise publish this work for non-commercial purposes provided that the work remains intact and includes this copyright notice.

New Comments are disabled, please visit


No events for this day.

view calendar week
add an event


Media Centers

Syndication feeds

Account Login

This site made manifest by dadaIMC software