Dissipation of Rent

Common Property in Land is Compatible with the Market Economy.

You can enjoy the benefits of a market economy without sacrificing your common rights to the land of Russia. There is no need to make a hard choice between the two. One of the great fallacies that western economists and bankers are foisting on you is that you have to give up one to enjoy the other. These counselors work through lending and granting agencies that seduce you with loans and grants to learn and accept their ideology, which they variously call Neo-Classical Economics, or "monetarism," or "liberalization." It is glitter to distract you and pave the way for aliens to acquire and control your resources.

To keep land common while shifting to a market economy, you simply use the tax system. Taxation is the form that common property takes in a monetary, market-oriented economy. To tax is to socialize. It's then just a simple question of what you will socialize through taxation, and how; but in the answers lie success or failure.

Not only can you have both common land and free markets, you can't have one without the other. They go together, like love and marriage. You need market prices to help identify land's taxable surplus, which is the net product of land after deducting the human costs of using it. At the same time, you must support government from land revenues to have a truly free market, because otherwise you will raise taxes from production, trade, and capital formation, interfering with free markets. If you learn this second point, and act on it, you will have a much freer market than any of the OECD nations that now presume to instruct you, and that are campaigning vigorously to make all nations in the world "harmonize" their taxes to conform with their own abysmal systems.

The very people who gave us the term laissez-faire -- the slogan at the core of a free market economy -- made communizing land rents a central part of their program. These were the French economistes of the 18th Century, sometimes called "Physiocrats," who were the tutors of Adam Smith, and who inspired land reforms throughout Europe. The best-known of them were François Quesnay and A.R. Jacques Turgot, who championed land taxation. They accurately called it the "co-proprietorship of land by the state."

Since their time we have learned to measure land values, and we have broadened the meaning of "land" to comprise all natural resources. Agrarians will be relieved, and may be surprised, that farmland ranks well down the list in terms of total market value. Thus, a land tax is not primarily a tax on farms; only the very best soils in the best locations yield much taxable surplus.

The most valuable land by far is city land. Ted Gwartney, a professional land valuer, is speaking to us about that. I have data showing that well over half the value of city real estate is the pure land value. In big, key cities, prices per unit of land go astonishingly high, dwarfing most other values by comparison. For example, at the height of the Japanese boom, in 1990, land prices in that great city rose so high that the appraised value of the land under the Imperial Palace in Tokyo was as great as all the land in California! At the same time, within California, most of the land value was in our cities, even though California is the premier farm state in the U.S.A. Urban land of such immense value makes a rich, rich tax base for you, or any nation.

Another natural resource (hence part of "land"), whose nature and value the mass of people are only slowly realizing, is the radio spectrum. In this age of communication its value is vaulting skywards even faster than the rockets launching the satellites that direct and relay signals through the spectrum. Each satellite requires a spectrum assignment, or it is nothing but space junk. One minor American entrepreneur, Craig McCaw, collected a bundle of spectrum rights for cell phones, and a few years ago sold them to AT&T for $12 billions. Then Mr. McCaw went partners with Bill Gates, perhaps the richest American, in a firm called Teledesic, to launch hundreds of satellites and amass radio spectrum rights around the entire world, including your part of the world, in the hope of dominating worldwide communications. Radio spectrum is a natural resource, and it belongs to the government, even in the capitalistic U.S.A. When Teledesic comes calling, under the auspices of our Vice President Al Gore, don't sell anything cheap! In fact, don't sell anything at all, but lease it for a limited time, so you may gain from future rises in value. And don't stint on the professional help you should hire to protect your interests: these lease contracts are complex, and are worth billions if you play your cards right.

Hydrocarbons are a third set of valuable resources. The values involved are gigantic. The recent merger of the Exxon and Mobil oil firms was valued at $260 billions, several times greater than the Russian annual budget. Why should private parties make off with all this natural value? Several nations, including some of your neighbors, support themselves entirely from these revenues. Norway pays for a lush welfare state from its oil revenues. Its reserves are so valuable that the mere change in their appraised value in several recent years has exceeded the entire GDP of Norway. And your oil reserves? If they match your production, they may be the largest in the world.

World oil prices are down this year, as you know, but there is another side to this. The devaluation of the ruble has raised the value of your oil in Russian terms, because the oil earns "hard" currency abroad. Your government has recognized this by imposing a special tax on the resulting "windfall," but we will see below (Sections 2,C and 2,D) that there is a much more effective way to tax resource rents.

The American state of Alaska holds down its other taxes by socializing part of its oil revenues, which otherwise would inure to a handful of the major stockholders of two corporations (ARCO and BP). Alaska not only holds down other taxes, it pays each resident - man, woman, and child - a social dividend of over $1,000 per year. Go thou and do likewise. Your expert, Dmitri Lvov from the Russian Academy of Sciences, a speaker at this meeting, has written that you could cover most of your national budget from your enormous production of oil and gas.

Many third-world nations like Venezuela or Nigeria have fabulous mineral oil that they fail to exploit for their own people, letting sophisticated or ruthless foreign corporations, in tandem with weak or corrupt insiders, reap the gains. The question for Russia is whether to follow their bad example and become a poor resource-colony of the west, or whether to assert your own sovereignty over your own resources for the benefit of your own people. You need look no further than Norway for a model.

Other subsoil resources have great value, too. Many nations, even backward ones, gain large parts of their national revenue from "hardrock" minerals. Bolivia, Gabon, Jamaica, Liberia, New Caledonia, Papua-New Guinea, Zaire, and Zambia have raised over 25% of their budgets this way in recent years; Chile, Thailand and Malaysia have taken lesser, but substantial amounts. Saskatchewan, a Canadian Province, raises large revenues from potash and uranium; Minnesota, an American state, from iron ore; and so on. Some other nations fail to raise much revenue from fabulous minerals from which others profit, like S. Africa with its gold and diamonds, West Virginia with its coal, or Missouri with its lead mines and reserves. Russia is a treasure-house of untapped mineral wealth that you can and should tax to alleviate the condition of the Russian people.

In arid lands, water is life, and the most valuable natural resource is water. For example, in southern California we need water so much we import it from the Feather River 600 miles north of us, pump it uphill through the long San Joaquin Valley, then over the high Tehachapi Mountain range, and tunnel it through the San Bernardino Mountain Range, all at great cost. When it gets here, it supplements and competes with local water that nature provides freely in the Santa Ana, San Jacinto, and other rivers. That local water then has a value equal to the high cost of importing the remote northern water. That value in the local waters is a taxable surplus. However, we have not learned to take that surplus value into the local treasuries; we give the water away, and worse, we actually subsidize people to withdraw water by helping them pay for dams, canals, and pipelines so they can waste water without paying for it. Thus we turn a public asset into a public liability - an extreme form of folly that is called "dissipating rent." In this age of growing water scarcities it is past time we learned to husband and nurture rent, in order to socialize it by taxing the surplus. So should you, in comparable circumstances.

Another value from water is to generate power. Again, California witlessly fails to socialize this value, but Canada, our northern neighbor, has shown the way. British Columbia, Newfoundland (the Labrador part), Quebec, and other provinces raise large revenues from charges on the use of falling water. Russia, with some of the world's largest hydro-electric projects, can do the same, or better.

Fisheries are another source of value. In the past most nations have let this rent be "dissipated" by overfishing. In recent years the U.S. and Canada have in effect "privatized" fishing in their offshore waters by limiting the number of licenses and boats. This limitation was needed and desirable, overall. It created large rents, where previously there were little or none, by preventing overfishing and the great waste of duplicate, triplicate, and even quintuplicate fishing effort. That is a good example of husbanding and guarding rent, which is necessary before you can collect it. It was not necessary or desirable, however, to give away this net benefit to private parties.

The government did not sell these licenses, but simply gave them away to owners of existing boats, and others with political influence. Each license now sells for something like a million dollars, creating a new class of instant millionaires and "parlor fishermen." This giveaway to the few, and takeaway from the many, created an instant class society where before there were equal access and equal opportunities.

These privileges are worth so much that there are now documented cases off Alaska where the parlor fisherman takes 70% of the total catch. The captain, the crew, and the owner of the boat, who do the work and bear the dangers and discomforts and financial risks of fishing, must get by with the other 30%. Parlor fishermen are simply leeches; these rents should be socialized, relieving the workers from taxes.

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The Russian Mafia today can be understood, in many cases, as promoting efficient resource allocation by preventing the dissipation of rent through competition. For example, Old Arbat Street in Moscow was for many years a place where artists would sell their wares to tourists. But to operate there, artists were required to pay the Mafia gang that controlled the street. The fees collected by the Mafia served to ration the space to an efficient number of artists. Without that rationing device, there would have been an excess of artists crowding the street and interfering with each other inefficiently. And people would have been getting up at 2:00 in the morning to get space before anyone else claimed it. In these circumstances, the Mafia action served to prevent the dissipation of the rent and did not reduce the net incomes of artists. If there were no public-good aspects of the provision of art, it could be argued that complete efficiency was achieved by this "spontaneous" private appropriation of rent.

The person who wishes to abolish such exploitative institutions as slavery, autocratic governments and Mafia protection schemes, without compensation for those who derive income from them, can be asked to explain why it is right to terminate these incomes without compensation, when the development of the institutions served to improve allocative efficiency.