'...without a knowledge of [the law of rent], it is impossible to understand the effect of the progress of wealth on profits and wages, or to trace satisfactorily the influence of taxation on different classes of the community' David Ricardo. When New Labour came to power it was on a wave of enthusiasm, based on the belief that, by abandoning Clause 4 and embracing humane market economics, they could usher in a more equitable social order - Blair's 'Third Way'. After three terms in office, they failed. The reason, Harrison reveals, is a hidden flaw in the market economy, which means that governments of all parties, who rely on the present tax system, transfer money from people on the lowest incomes to asset-rich investors. This was not the intention of the designers of the Welfare State: 'progressive taxation' was supposed to equalise people's life-chances. The reality emerges as the author traces the effect of taxes used to pay for public services. The process has remained unrecognised because the transfer operates unseen through the 'invisible hand' of market forces. Harrison exposes how this works by analysing the property market.
Owners of high-value homes recoup what they pay in taxes through rising property prices. Much of this increase is the result of tax-funded state spending on infrastructure and public services - good state schools, for example, can add GBP20/30,000 to house prices. Lower-income earners, living in less desirable locations, and families who rent their homes, do not share this windfall. This is why the gap between rich and poor, and rich areas and poor areas, continues to widen, defeating the best intentions of governments. This outcome is not the result of market failure, as many argue, but the failure of governance. Economists and policy-makers choose to ignore the Law of Rent, also known as Ricardo's Law after the economist who provided the first scientific explanation of how it works.
Fred Harrison is Research Director of Land Research Trust, London. After a career as a Fleet Street investigative journalist, he a consultant to a number of Russian academic and political bodies in their efforts to implement a more equitable transition to a market economy. Recently he has turned his attention to the failure of economic analysis and public policies in the market economies.