The equal-opportunity component of national income

A submission by Prosper Australia to “MAP 2.0”
(Social & Progress Reporting Section, Australian Bureau of Statistics)
September 30, 2011
(not confidential)

“The day will come,” according to UNICEF, “when nations will be judged... by the well-being of their people: by their levels of health, nutrition and education; by their opportunities to earn a fair reward for their labours...” (emphasis added).

The MAP 2.0 submission booklet quotes this statement with apparent approval (p.8) and goes on to mention opportunity in other contexts. As an aspiration (p.9), it suggests “People have equity of opportunity to enhance their material living standards”. As a social goal (p.13) it offers “Good education or training so everyone has opportunities”. As an economic goal (p.14), it proposes that “Everyone has the chance to improve their standard of living”, where “chance” is obviously a synonym of “opportunity”. Among the articles on the MAP 2.0 blog, the “Benchmarks for Australian Citizenship” from the National Citizenship Project and the “Australian Values Statement” from the Department of Immigration and Citizenship endorse equality of opportunity.

But what is this “opportunity”?

If you want a job, you need a place to live within commuting distance of the job. But you can't make that place. Even if you can build your own house, you can't make the land that it occupies; you have to pay someone else for the land. The better the job opportunities surrounding that land, the more competition you will have for access to that land, so the more you will have to pay. And whatever you pay reduces the net return on your labour. If the rival bidders for that land expect to make more money than you, then you won't be able to compete with them. Your prospective employers will then complain of a lack of willing workers when the real problem is a lack of living space that willing workers can afford.

But don't blame the employers. If you want to employ people, you need a place to conduct your business within commuting distance of the workers' homes. But you can't make that place. Even if you can build an office or a factory, you can't make the land that it occupies; you have to pay someone else for the land. The better the business opportunities surrounding that land, the more competition you will have for access to that land, so the more you will have to pay. And whatever you pay reduces the profit on your business.

Because we can't make our own land, the opportunities that go with land are not distributed equally, but are distributed according to the initial allocation of land. So it is with all the “non-produced assets” in the ABS National Balance Sheet: land, subsoil assets, native standing timber, and electromagnetic spectrum. Ownership of such an asset confers a measure of protection from competition. The economic return to that protection is economic rent.

Of course there are also opportunities that we can make for ourselves. If you want a job, you need a willingness to work. That much is an opportunity that only you can make. If you want to hire workers, you probably need some of what the classical economists called capital: buildings, machinery, equipment and stock-in-trade. In the language of the ABS National Balance Sheet, these things are “produced assets”. These too are opportunities that you can make, albeit with more difficulty; but to make them you must have access to land. If producing your own capital is too difficult, you can work for someone who can produce it or already has it; but that requires both that person and you to have access to land.

If access to land and other “non-produced assets” were distributed equally, labour and capital would be free to earn their just returns, and opportunity would be truly equal. But as long as the economic rent of “non-produced assets” is pocketed by a subset of the population, it reduces the reward for taking those opportunities that are equally distributed.

In short, the equal-opportunity component of national income is that part of national income which is not captured as privatized economic rent.

National income net of privatized economic rent is a single quantity which can increase, decrease or remain constant from one year to the next, and which is therefore suitable for representation as a green, red or amber “traffic light” on the MAP “dashboard”.

To compute national income net of privatized economic rent, one must quantify privatized economic rent in so far as it is part of national income (not merely notional), and subtract it from national income.

Imputed rents of owner-occupied land and actual rents of tenant-occupied land are part of national income. These could be estimated from ABS 5204.0 Table 61, if only that table indicated how much of the land is privately owned.

The same table obviously yields information on annual increases in land values. But these “capital gains” are not part of national income except to the extent that they are realized. Unrealized capital gains are individually realizable, but not collectively realizable, because any attempt to realize them all at once would cause values to plummet. As they are not collectively realizable, they are not collectively spendable and are therefore not part of national income. The ABS does not seem to collect data on realized capital gains (and the ATO does not need to, because not all such gains are assessable for tax purposes).

While ABS 5204.0 has information on values of subsoil assets, more information is needed to quantify the economic rent, because the rent is realized by extraction, not by mere occupation.

Annualized values of native timber harvesting and spectrum licences are also needed, but are likely to be small compared with land and subsoil assets.

Measuring the equal-opportunity component of national income therefore requires some additional data collection. But the addition seems modest compared with the importance of the question, and with the vast array of data already collected by the ABS.

Gavin R. Putland (Research Officer)
Prosper Australia
1/27 Hardware Lane, Melbourne 3000
www.prosper.org.au.