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

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

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

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

6.  Phony proxy class

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

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''

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

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

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''

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

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

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

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

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

14.  The U.S. dollar

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

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

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

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

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

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

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


[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

[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'',
Censored, #12 for 2002–3,

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

Copyright © 2005 Prosper
Australia (,
Author: Gavin R. Putland (
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