At the risk of being accused of ranting: this is complete nonsense. Economic rent had absolutely nothing to do with Ricardo's labour theory of value and everything so do with the rising price of 'corn' during the Napoleonic Wars. It wasn't labour, according to the theory, that caused the appearance of rent but the emergence of zero-rent land. In other words, rent for a given unit of land was not determined by its productivity (fertility) but by the return to the poorest (zero rent) land being cultivated.

By the 1830s very few economists adhered to the Ricardian doctrine of rent. It was John Stuart Mill who in 1848 resurrected this fallacy in his astonishingly successful Principles of Economics. Moreover, irrespective of Davidson's contention, very few classical economists were disciples of the labour theory of value. Davidson's article was followed by an IPA press release reporting that Julie Novak, an IPA Research Fellow, viewed the Rudd proposal as just meaning more taxes. True. But nowhere did Julie Novak point out that the reasoning behind the tax was utterly fallacious.

Because of Sinclair Davidson's article it is now hardly likely that the IPA will publish an actual refutation of economic rent. No wonder I reached the conclusion that any mining company that has donated to the IPA deserves a full refund.

To be fair, however, the IPA is merely echoing the orthodox view. Mr Des Moore, for instance, a leading rightwing commentator and a former deputy head of the Australian Treasury, hasn't rejected the idea of a resource rent tax. Then there is Liberal Party Senator Nick Minchin who thinks a resource rent tax would be acceptable if it went into a "wealth fund". (No wonder I despair of Liberal Party politicians learning real economics.)

Proponents of the tax like Saul Eslake, a former chief economist at the ANZ Bank and now program director at the Grattan Institute, think mining companies are making too much money. How much is too much is something they never deign to tell us. Peter Martin, leftwing economics correspondent for the Sydney Morning Herald, Age and National Times, describes mining profits as "booty". Yep, this is his idea of economic analysis. Behind this type of thinking there seems to rest an atavistic feeling that there exists some minimum income that must not be exceeded. Whatever it is, there is absolutely nothing scientific about it.

In economics a super profit is that which exceeds the normal rate of return or profit. Unfortunately for proponents of the super profits tax such a return is a general equilibrium concept. What is not generally recognised by economists is that the normal rate of return is in fact the rate of interest. By definition a profit cannot exist in a state of general equilibrium. It ought to be clear to economists that it is illegitimate to apply general equilibrium concepts to the real economy.*

As the normal rate of return is the rate of interest it follows that all profits are abnormal or, as Rudd and his mates mischievously put it, super. And as the Government defined 6 per cent as the normal rate this leads to the conclusion that the likes of Eslake, Martin, Ferguson, etc., should insist that every enterprise in the country must have any 'profit' in excess of the arbitrary 6 per cent return taxed at 40 per cent. Of course, the idea of taking this argument to its logical conclusion never occurred to them.

What needs to be understood is that profits are maladjustments between supply and demand. When these maladjustments appear market processes move to eliminate them by increasing investment and output. This is exactly what has been happening with the mining industry throughout the world. Investment and output have been rocketing as the industry strives to meet excess demand. Now if these profits are a passive residual — as stated by the rent concept — or booty as suggested by the brilliant Peter Martin then taxing them away will not influence investment and output. As George Orwell once said with respect to another equally stupid idea:

One has to belong to the intelligentsia to believe a thing like that: no ordinary man could be such a fool. (George Orwell, Decline of the English Murder, Penguin Books, 1965, p. 178).

It follows that taxing profits must reduce the level of investment and hence output. However, Peter Martin has an absolutely super-smart rebuttal. It's not really a tax but "a profit-sharing arrangement". That this is the kind of profit sharing that the Mafia practises never occurred to him. This brilliant economic insight was followed up by the equally brilliant observation that "companies that want to extract our resources have no choice but to pay our taxes".

Evidently people like Martin have never heard of Canada, Africa or Brazil. That the Minister for Resources Martin Ferguson is on the same planet as Martin was revealed by his absurd statist opinion that the tax would make "the Australian taxpayer an equity partner in resource projects". (This lot have no idea just how fascist their opinions really are.)

Citi Australia reported that the tax would result in Australian miners being the heaviest taxed in the world, with the total government rake-off reaching 58 per cent, making the tax 45 per cent greater than its nearest rival. Yet we are told in all seriousness by supporters of the tax that differences of this magnitude will have absolutely no influence on investment.

When in response to the 40 per cent tax Cape Lambert Resources walked away from exploration plans at its iron ore project in the Pilbara the leftist media immediately swung into action, arguing that the company's move didn't have anything to do with the tax. They neglected to mention that the company decided to develop the Marampa Iron Ore Sierra Leone rather than persist with Australia. How can this be? Didn't the brilliant Peter Martin state that these companies "have no choice but to pay our taxes"?

As soon as Rio Tinto's Iron Ore chief executive Sam Walsh announced that the tax had forced the company to reassess it plans to boost production from its Pilbara mine the left immediately declared that this does not prove the tax hurts investment because the company is only reconsidering the situation. This is sheer desperation on their part.

Unfortunately politicians are being advised by people steeped in the theory of perfect competition where there are no profits, no entrepreneurs and no risks. What its adherents overlook is that there is no competition either. Applying this model to the real world can result in destructive policies, a "super tax" being one. What the mining people overlooked is that ideas — particularly bad ideas — matter a lot. Judging from their comments they still haven't absorbed the lesson.

*Some readers wrongly assumed that I am arguing that 'normal profits' cannot emerge "in the real world". Of course they can. My underlying point is that the majority of economists — consciously or otherwise — approach this subject from a position of general equilibrium with the result that the real world is treated as an aberration that needs to be brought closer to the mythical state of perfect competition. (That this would be a state where all competition, entrepreneurial activies and technical progress has ceased doesn't seem to have occurred to most of them.) This is what I meant when I criticised them for applying a general equilibrium concept to the real world.

Ken Henry's dangerous fallacy of taxing "imputed rent"

The Treasury wants to impose the fallacious rental resource tax on mining companies

Gerard Jackson is Brookesnews' economics editor

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