|Wealth and Want|
|... because democracy alone is not enough to produce widely shared prosperity.|
|Home||Essential Documents||Themes||All Documents||Authors||Glossary||Links||Contact Us|
Land as a Distinctive Factor of ProductionThe classical economists treated land as distinct from capital: "land, labor and capital" were the three basic "factors of production." They were mutually exclusive. They were comprehensive, including all economic agents. Each was also "limitational," meaning at least some of each was needed for all economic activity (v. A9, below)1 They made a coherent system, like Humboldt’s Cosmos, in the spirit of The Enlightenment that spawned them both.
updated June, 2004
Land as a Distinctive Factor of Production
Neo-classical economists denied the distinction and undertook to purge land from economese.
The dominance of "fusers" is shown by the prevalence of 2-factor models, wherein the world is divided into just labor and capital.3 Land is melded with capital, and simply disappears as a separate category, along with its distinctive attributes. A number of economists don't buy it, but don't do anything about it - acquiescing in error by silence, indifference, passivity, or anxiety of the professional consequences. They handle the question by "going into denial," as it were, resolving a vexing issue by pretending it isn't there. Anything else spoils the web of interpretation through which their art seeks to make human experience intelligible.4 Truth will not be made manifest by donning blinders hedging, especially against such motivated forces as have an interest in hiding unearned wealth behind the skirts of capital.
4. Thanks to Wm. H. McNeill for the phrasing.
The market exchange of capital for land causes an elementary failure in the minds of many. Land and capital each have their prices and may be bought and sold for money. Each alike is part of an individual's assets, colloquially called his "capital". Each is a store of value to the individual. What is true of each individual must be true for all together, is the thinking: it is the "fallacy of composition." We will see herein that society cannot turn land into capital (A-6), and land is not a store of value for society (A-10).
The discipline has not totally eliminated land, but marginalized it. The discipline has not totally terminated land: it is too subtle for outright skullduggery, preferring equivocation and confusion. Rather, it has marginalized it. There is a subdiscipline called "Land Economics," and a journal of that name. There are journals of Agricultural Economics, Urban Economics, Regional Science, Environmental Economics, Natural Resources, and more. There are also whole disciplines of Geography, Economic Geography, Military Science, Biogeography, Geology, Geometry, Surveying, Astronomy, Theology, Ecology, Oceanography, Meteorology, Soils, Physiography, Topography, and Hydrology, all dealing with The Earth and Nature and Creation as definable topics distinct from man's works.
The subdisciplines are kept away from the "core" and "mainstream" of economic thinking by compartmentalization and colonialization. Patronizing "land economics" as a colonial discipline keeps potentially contagious movements within the empire, where they can absorb critical tendencies under watchful control, while yet remaining safely remote, in the outskirts of the system. Orthodoxy flows out from the core, communicated via mandatory "core courses." Land economics is banished from the "commanding heights" of money and banking, macropolicy, and required "basic" courses in methodology and micro theory.
Colonial life is safe and easy, if dull and unfulfilling, but once labeled "colonial" one is supposed to remain in the assigned cage. One who attempts integration is "overambitious," and "spread too thin". Colonials are not supposed to relate land economics to unemployment, inflation, financial collapse, deficit finance, and such core topics. They become unwitting co-conspirators in marginalizing their subject.
Micro theory is the inmost citadel of holy writ, where "the economic way of thinking" is inculcated. It is required of all economics students before they venture into real issues. It becomes their shibboleth, their lingua franca, and shapes their worldview. Within common micro theory, to the extent it relates to real life at all, the technique has been first to relegate production economics to a minor role: "price theory" comes first. Production economics deals with the optimal combination of inputs in production, and how this relates to their relative costs. That should lead right into factoral distribution, but this aspect is soft-pedaled or omitted entirely. This omission alone is a fatal fault, considering that the forces determining land rents vary inversely with those determining rates of recturn on capital (cf. A-7 below).
Within production economics, "variable proportions" with "factor symmetry" replaces diminishing returns. The parcel of land disappears as a unit of analysis, replaced by "the firm," a disembodied spirit that combines resources optimally, treating all alike as variable "in the long run." In the "short run," land is subsumed in "fixed costs"; rising demand that raises rents is just "imputed away" silently and lumped with other elements of "fixed cost." If that sounds muddled, it is because what it describes is muddled.'
Common micro theory finesses Time. It deals with economic relations as though they occurred at a point in time (and space as well); as though they were relations of coexistence, rather than a cavalcade of events in sequence. Sometimes two points are allowed (short run and long). Thus micro theory can ignore the birth of capital, its growth, maturity, senescence, death, burial, and replacement, vital elements of its difference from land. Time, and relations of sequence, are hived off to the far satellite of "finance," usually not even taught in departments of economics. Time is also referred to under "history of economic thought," as an obsession of some 19th century Austrians who wrote quaintly of "roundabout" (time-using) methods of production.5 Relations of sequence are found in macro, but not firmly integrated with microtheory, which is the enduring core of the discipline. Microtheory still deals with relations of coexistence in time, and space as well. As A. A. Milne once wrote, "It isn't really anywhere, it's somewhere else instead." Of neoclassical theory we may add, "It isn't really anytime, it's some other time instead."6
A compulsive trendiness grips theorists, who produce new words and concepts monthly, raising insurmountable barriers of communication. These seal off the profession not just from the outside world, not just from reality, but from itself, as it subdivides economic thought within elaborate mazes behind ever thicker walls of new argot. Jesuits quibbling with Jansenists in 18th Century France were never more arcane nor tiresome than most economic theorists today. These elaborate structures rise, however, upon the spaceless, timeless basis of micro theory inherited from J.B. Clark and Frank Knight. They can be no better than their foundations. Indeed, that is what makes them so tiresome.
All that is confusing for students and others. Land does have distinctive qualities for economic analysis and policy. This essay gives 10 primary reasons why land is distinct from capital (and of course from mankind itself) as an economic input. Then it gives 18 important economic consequences thereof, and their policy implications. Making land markets, land policy, and land taxation work well for the general welfare is a major challenge for economists and statesmen. They have neglected it too long by crediting and following the peculiar neo-classical sophisms that obscure or deny all distinctions between land and capital.
A-1. Land is not produced nor reproducible
Land is not produced, it was created. It is the world, the planet from which man evolved, with the sun that energizes it and the orbit that tempers it. Land is a free gift, variously expressed in different philosophies as Spaceship Earth, the Big Blue Marble, God's Gift, Creation, Gaia, The Promised Land, or nature. Mankind did not create The Earth with its space and resources, nor can we add to them. We can only acquire them, often by fighting, or rent-seeking, or in other counterproductive ways. Man at best improves and develops capacities inherent in the free gift. It is disappointing, and should alert us and make us suspicious, that economic analysis would ever purge out this paramount, self-evident truth.
"Land" in economics means all natural resources and agents, with their sites (locations and extensions in space). Land is not just the matter occupying space: it is space. It includes many things not colloquially called land, such as
Capital (K) is that which has been produced but not yet used up. Capital is formed by human thrift, forbearance, investment and production. Only after mankind forms and makes capital does it bear much likeness to land, in that they coexist. Ordinary micro-economics obscures the differences because it deals mainly with relations of coexistence, ignoring the continual formation and destruction of capital, ignoring time and relations of sequence. Thus it excludes from its purview one of the prime differences between land and capital. The life of capital, like that of people, is marked by major sacraments of birth, growth, aging and death - all missing from micro theory. Economic life is a cavalcade in which the birth and death of capital are dated events. Micro deals mainly with how existing resources are allocated at a moment in time, not how they originate, grow, flourish, reproduce, age, die, and decompose.
Capital occupies space; land is space. In common micro theory, resources and markets come together at a point not just in time but in space. Again, it excludes from its purview one of the prime qualities of land.6
For the reasons given, alone, land and capital are mutually exclusive. There are, however, nine more, which follow.
A-2. Land as site is permanent and recyclable
Land as "site" (location plus extension) does not normally wear out, depreciate, spoil, obsolesce, nor get used up by human activities incident to occupancy and production. In contrast, capital depreciates from time and use, routinely and by nature. After being formed, it must be conserved from entropy by continual maintenance, repair, remodeling, safeguarding against theft and fire, and so on.7 Like our own bodies, it returns to dust; land is the dust to which it returns. Inventories are depleted; moving parts wear out; fixed capital depreciates with use and time.
Land normally does not depreciate as a function of time. Most attributes of land also withstand use and abuse. Most land is, rather, expected to appreciate in real value in the long run. Values go in cycles, but the secular history is upwards as population, capital, and demands all grow while land remains fixed. Capital has a period of formation during which it accretes value by storing up other inputs and changing physical form, but that is a phase. Once formed, almost all capital fails with time.
Perhaps the most durable capital is intellectual, like the writings of Plato. These, however, do not endure generations without the continual human effort and expense of education. As schools starve and libraries close, it is sadly certain that much will be lost. Under any conditions much is twisted in transmission, like classical economics itself.
Capital, however durable, also obsolesces because it is subject to continual competition from streams of new products. Intellectual capital, however classic, is subject to endless competition from floods of new ideas and discoveries. Land does not obsolesce from this cause: there is no new land, let alone modem, state-of-the-art land. Both land and capital are subject to demand-obsolescence from changes in tastes and fashions, but overall the taste for land as a consumer good rises as incomes and wealth grow. The writer has documented elsewhere how the land share of residential real estate value rises sharply with its total value.8 The land part of residential real estate is a "superior good"; the building part is not.
It follows that the demand for land arises over time with incomes, but faster than incomes. For example the soaring demand for golf has produced 150 golf courses in one California county (Riverside) alone, preempting a good bit of the usable land and a huge share of this natural desert's limited water resources. The western quarter of Massachusetts, the Berkshires, with adjoining parts of Connecticut, New York, and Vermont, has become one vast country estate for suburban New Yorkers and retirees, and is priced high above its farm value. Ski resorts, hunting clubs, yacht harbors, spas, beach resorts, and such uses increasingly outbid mere utilitarian uses for prime lands. There is also a high and rising technical multiplier of demand for land to complement modem consumer capital. For example, the parking demands alone of 200 million private autos in the U.S.A. preempt an area as large as Maryland and Delaware combined. Unlike most of Maryland and Delaware, the parking lots are mostly on high-valued land in cities. Soaring demands and reuse values are thus the norm in an affluent society.
What can it mean to "consume" land, when it does not get used up? It can only mean to occupy or preempt a time-slot of space. That has the most profound implications for the meaning of "consumption" in economic thinking, and "consumer taxation" in fiscal policy. Economists have neglected and papered over these matters almost completely. These are pursued in B-13 below.
Some attributes of some lands do deteriorate from some uses or abuses. Extractive resources call for special analysis, which the writer has attempted elsewhere.9 To avoid lengthy repetition from previous publications, the word "land" herein refers to the permanent qualities of land, exemplified by (but not limited to) site. Remember, land is not just matter, it is space itself.10 It is not unusual for land first to be mined, then used for dumping wastes, then sealed over for urban use. I myself have lived comfortably over an old munitions dump on Lockehaven Drive, Victoria, B.C. Not far away is Butchart Gardens, a world-renowned beauty spot, fashioned in a once-ugly gash left by a stone quarry.
9.Land is reusable. All the land we have is second-hand, most of it previously-owned. Our descendants, in turn, will have nothing but our hand-me-downs. As there is never any new supply, the old is recycled periodically, and will be in perpetuity, without changing form or location. Melded briefly with fixed buildings, land survives them to go one more round of use. Even while melded with capital, land is fit for another use at any time, unlike the capital on it. Land retains a practicable, measurable, meaningful opportunity cost. Land value in cities may be defined as "what is left after a good fire"; arsonists take that quite literally. In Beverly Hills, California, "tear-downs" are routine as taste-obsolescence races through fashionable neighborhoods where the land outvalues even the elegant buildings. These are dated after thirty years.
The opportunity cost of capital is fleeting. Capital loses most of it the moment it is committed to a specific form, whose physical alternative use is often only as scrap. Land's "opportunity cost" is real and viable at all times. The scrap value of capital is often zero or negative (radioactive waste supplying an extreme example).
Land may be afflicted with such "negative capital," the harmful waste from prior usage. An example is the spent carcass of an old building needing costly demolition. Some would class that spent carcass as a subtraction from the site value, but "negative capital" makes more sense, as may be inferred by considering the relations between a landlord and a tenant in a perfect market. The lease holds the tenant liable for damages he does and wastes he leaves; the prudent landlord requires of the tenant a deposit, or in larger cases a bond, to assure performance. Both acknowledge that damage done by use is imputed to the user, not to the land.11
11. An example on a social scale is the bonding imposed on nuclear generators by the US Federal Energy Regulatory Commission (FERC). FERC requires utility firms to set aside a percentage of their fuel budget in a sinking fund to pay for "decommissioning" plants at the end of their economic lives.
Too often, from institutional or market or human failure, the land is left damaged, with no recourse against those responsible. Then, indeed, the damage becomes part of the land, just as some of the good relics of history may as well be considered part of the land. Toxic wastes, and endemic parasites imported with previous crops or trees, become mixed into the dirt. We do not trivialize nor quibble over what to call such damage: it happens, and it impairs the reuse value of land. In such cases the site is less valuable, but still permanent and recyclable. Such cases are, fortunately, still more the exception than the rule. They are at most a minor qualification to the major points made here.
Physical abuse of land is less a problem, actually, than the fall of value that results from social decay. Much of land value is a social product. When a society sickens, declines, and self-destructs, as we know may happen, it lowers ground rents, which mirror social progress and decay. We cannot surely forecast that our own society will not self-destruct, as parts of cities already have. However, until it does, land will outlast capital economically. Even when it does, landownership may remain the last bastion, as happened in the feudal system. Even if barbarians overrun us, it is the land they will take: little else will remain.
A-3. Land supply is fixed
Being both unreproducible and permanent, land remains fixed.12 Both the overall quantity and the special qualities of specific lands remain fixed. Capital changes its form and location with each turnover, while land remains the same. The Tyler Galleria neighborhood in Riverside, California, makes an example. In the last fifteen years over half the buildings have been replaced or heavily remodeled. Streets have been repaved and widened; utilities enhanced. Inventories have turned over hundreds of times; cars in the parking lots have come and gone thousands of times. Through it all, the land is the same.
The fixity of land has several aspects.
13.Secured or "real" capital is capital affixed to land. The physical carcass of most buildings is rooted to the spot, leading some to allege buildings are as fixed in location as land. That would be specious, economically. The capital locked up in the carcasses of buildings is normally recovered, as they depreciate, in Capital Consumption Allowances (CCAs) which may be reinvested anywhere.
In Englsih the etymology may reveal the king's underlying ownership: "real estate" probably springs from rotal estate, "real either being contracted from "regal" or borrowed from the French and Spanish real, royal. Spanish law does recognize "regalian" ownership of subsurface minerals. (In Latin American history, this took the form of a 20% severance tax.)
Our word "realize," meaning convert to money, likely derives from the fact that money was issued by kings and bore their images. The Spanish real was a silver coin of wide currency. Spanish coin was the western world's hard money for four centuries.
"Basic" micro economic theory, as ordinarily ordained today, is constructed so as to paper over this basic difference of land and capital. In its "short run" land and capital are both fixed. In its "long run" both are equally variable to "the firm," the disembodied spirit used as its unit of analysis, existing at a point in time and space. Thus, one can specialize for a lifetime in "basic micro" while remaining unaware that capital, over time, changes its form and location as it turns over, unlike land. Land yields no such mobile funds as CCAS. It does not depreciate, and is priced accordingly higher, so its income is only enough to yield a return on the price paid, not a return of it. (See A-5, below)
Land is "mobile" only in the limited sense that its use may change. Some micro economists would have this sort of "mobility" equate land to capital. See A-5,a, below.
A-4. Land is immobile in space and uncontrollable in time
Robert Triffin wrote that "excess returns are either competed away, or imputed away." Excess returns to capital are the ones that get competed away; excess returns to land get imputed away. Rents and land prices rise where demand is focused. Interest rates, the cost of capital, do not rise: capital abhors a vacuum, and rushes in to bring returns back down to the common worldwide level. If anything, interest rates are lower in central cities because of the more perfect markets that develop there. Intensive development and use of the third dimension at the hub of a city makes it even more attractive, through synergy (conglomerate increasing returns to scale), raising rents still more.
b. Land values are marked by continuity in space
The price of land is closely related to that of adjoining land, for they are usually near substitutes. Richard Hurd, pioneer author of the classic Principles of City Land Values (1903), posited this rule, noting the continuity is both concentric and axial. It is therefore possible to map land values as one would map elevations, drawing contour lines of equal unit value.
Land services may be and are used to produce capital, and the capital is stored up. An example is land used for growing timber, or raising seedlings to bearing age. Another example is flowing water stored in a reservoir. This does not convert land into capital, however, any more than it converts labor into capital. Stored-up labor and land-service are capital: that is what capital is, by definition. 15 Nature's services per se, however, come in a flow like time itself, unbidden and uncontrollable. Mankind cannot advance nor retard its services at will.
15. On the point, I recommend the writings of Knut Wicksell, e.g. Value, Capital, and Rent. After praising the works of Boehm-Bawerk, Wicksell faults him for treating capital simply as stored labor. Wicksell makes it also stored land, whose distinctiveness and importance he recognizes.
Considering the improvident nature of mankind that is perhaps a good thing, but good or bad, it is so. Many polities have hit upon this trait of land to stabilize society, by dividing up land and making it unalienable. The Roman Demeter, for example, was goddess of farming, family, and social order, which the early Roman republicans viewed as a package.16 Thus they created a society of small citizen-proprietors who could never squander their major asset, and who could not sell to foreigners.
16. Somewhat overlapping, the three Horae were goddesses of Justice (Dike), Order (Eunomia), and Peace (Irene).
Land titles serve as "stores of value" for individual owners. By the common fallacy of composition, plus some confusion, that makes it all too easy for laymen, and economists too, to think of land as a store of social value. The individual can tap this store, however, only by selling it to another. Neither of them can advance or retard the flow of services at will.
Usually the given flow is steady or seasonal, but not always or necessarily. Seasons change, climates change, environments change, blights and pestilences come and go. The essence of land service flow is not steadiness, but exogeneity. Alfred Marshall defined the "public value of land" as the product of three factors exogenous to the private owner: nature, public services, and spillovers from the use of nearby private land. This "neoclassical" was classically right on this point (great economists seldom fit snugly into tight boxes).
It is different when a growing firm adds labor and capital to its operation. These are drawn from the margins of other operations, but they are marginal only in quantity, not location. They are homogenous units, and may be added to the core of the growing operation. That continues to be so, however much Firm A grows, or B shrinks. This is because labor and capital migrate, and their supplies are a "pool." No one neighbor is singled out for raiding; there is no locational factor.
This locational factor qualifies the idea of "factor symmetry," as developed by Clark and Wicksteed, and expressed in the replacement of "diminishing returns" by "variable proportions" in economic analysis. It is impossible to add "homogeneous" land to an operation: each unit has a unique location, and added land is normally farther from the nucleus.
This consideration, taken alone, would make landholdings tend toward uniformity, to minimize internal transport costs. In fact, however, landholdings are less uniform than other measures of firm size, like labor force, capital improvements, sales, and value-added. These facts are consistent with an hypothesis that the acquisition of land as a store of value, dominated by financial forces tending toward concentration, interferes with efficiency in land markets. This hypothesis is further considered in B-11.
Added land, besides being farther from a nucleus, may be farther from a street interface. In retailing this is extremely weighty. In retailing this is extremely weighty - cf. the rule of 4-3-2-1. Land added to water front parcels may be far from the shore, and so on.
e. Land is not uniform to a city or economy
A city that grows in capital and people generally enjoys a long stage of increasing returns to the composite urban economy, even though each atomistic site is improved in the stage of decreasing returns to capital and people. This antinomy is due to synergy. Cities exist to bring people and capital together in space. People attract more people; capital attracts more capital; people and capital attract each other.
Adding land to a city, on the other hand, often results in diminishing and even negative returns to the composite city. Cities are already full of holes. Adding more land, especially in the sprawled manner of modern American cities, adds to the cost of tying the pieces together. There is an enormous literature on the wastes of sprawl. It may be summarized in two points.
i) Land division entails "packing."
One individual parcel does not expand or contract without impacting the whole system. Parcels have common boundaries and must be packed together so that they all fit. Many costs like fencing and roads and utilities are shared along the common boundaries. These costs vary with the length of the boundaries.
ii) Capital and labor come in "nuclei."
Each parcel has its nucleus, as, for example, a farm centers on its farmstead.17 The nucleus is the indivisible core of labor/capital applied to the land. Land division entails more nuclei, hence greater intensity of land use, for whatever purpose.
"Nucleus" here is a proxy for labor/capital, although one nucleus is not a fixed quantity of labor/capital. Generally the nucleus shrinks as the acreage shrinks, but in lesser proportion, so intensity of land use rises.
But there is more here than a simple matter of quantities and proportions of inputs. There is also a distance factor. The more parcels we add the closer are their nuclei, and the less is the cost of linking them along the common lines. The cost per acre is, to be sure, higher: that is inherent in adding more labor and capital to a given amount of land. But the linkage cost per parcel drops as we add nuclei by dividing land into more parcels.
There is an asymmetry here that has been obscured in the evolution of marginal productivity theory, with its effort to show that the relationships among all the classical factors of production are "symmetrical," so that diminishing returns is simply variable proportions. Land is not symmetrical with labor/capital. When you add nuclei of labor/capital to land, they get packed closer together. But when you add land to fixed labor and capital, the units all get farther apart -- the land units as well as the nuclei of labor/capital.
Such distancing of the active nuclei of economic life requires more capital and land devoted to the linkages among them - "urban sprawl" is the familiar term. Sclerosis is the corresponding medical condition: an overgrowth and hardening of connective tissues at the expense of the active tissues they link. It is pathological for societies, as it is for organisms.
A-5. Land does not turn over, but rather is recycled and is versatile
J.B. Clark, as is well known, tried to wipe out this distinction, which brought him into debate with Boehm-Bawerk over whether capital has a "period of production". Frank Knight, following Clark, renewed the debate with Friedrich von Hayek. The intent of both Clark and Knight was to shelter land behind the skirts of capital, to counter a popular movement for taxing land more and capital less. Students are still required to study these dreary, mystical exchanges, which seem to have no other purpose.
The rate of turnover of capital may vary, and does, over a wide range, from once a day for restaurant fresh vegetables to once a century for slow growth timber. Thus, the "valence" with which capital combines with labor is highly variable. The land/labor valence is not fixed, but it contains no such extreme factor as this.
Land must serve all of man's needs of the day, and perpetual streams, waves, and eddies of new fads and demands, with no physical change. Even land taken from the Indians, as they keep reminding us, had a previous use. Even land that is allegedly “made” by filling in underwater sites is taken from navigation, fish, recreation, wildlife, and other previous uses.
New demands and discoveries bring out new virtues in old land but it is man that has changed, not land. The resources were always there waiting. Land rarely obsolesces in the sense that specific capital goods do. Land's opportunity cost remains a viable option, because the only source of land for new uses today, as for ages past, is to take it from its previous use. We tear down old buildings mainly to salvage and recycle the land, not the capital in the buildings: this turns into scrap and junk that is usually worth less than the cost of hauling it away. The tribe of economists, whose inclusions and omissions are so often a puzzle, fill their papers with references to “opportunity cost” and “alternative uses,” but hardly ever mention that capital goods, especially buildings, have little or none. An honorable exception was Alfred Marshall, but since his generation has passed one finds abundant lip service, but fewer and fewer references to what Marshall actually said (Principles of Economics, (New York: The Macmillan Company, orig. 1890; 8th Ed., 1920; 7th Printing, 1959, 1948 (sic), p.441)) the concept of opportunity cost should apply mainly to land.
Here we meet an apparent contradiction it is important to sort out, lest we be led astray by J.B. Clark’s confusing writings on capital. As specific capital goods age they yield “Capital Consumption Allowances” (CCAs) which the owner can then reinvest in anything. That makes the pool of capital totally versatile over time, as capital turns over. It is specific concrete capital goods that lack much opportunity cost and versatility.
Land never turns over the way capital does, and so lacks the extreme and Protean versatility of the pool of capital in the long run. It is before capital turns over through its CCAs that land is more versatile than capital. This is relevant to tax matters because the assessor can not value an existing building by its opportunity cost, but he or she can always value land that way.
Economies of scale are inherent attributes of capital and labor, not land. They spring from using large units of capital; or large teams of workers with specialized members. For this large lands are required, but the scale economies are not in the land. It is usually a social diseconomy to acquire large lands because they impinge on others and push them out of the way. Thus a large truck requires more street space which may require widening streets which take land from the buildings between the streets. Large buildings require either land assembly, or prior withholding of land over long periods, or going to bad locations on cheap land. All of these are costly.
In subdividing land into small parcels there are, it is true, extra costs, but the cost per lot falls. Of course the cost per square foot rises, but the cost per dollar of value created generally also falls, which is why it is done. Apartments, condominia, strata titles and time-sharing represent extreme subdivision without increasing cost.
Those who require much land normally have limited choice of locations: they must go where land may be had in large pieces. It is either that, or buy it already assembled by others. That is not so true of those who need large labor or capital inputs.
A-6. Land is not interchangeable with capital
Land is not convertible into capital, nor vice versa. Exchange of land for capital has misled many into equating them, but only through inadvertence and the fallacy of composition. Exchange is not interchange: exchange does not change the quantity of either land or capital. Capital is convertible into any other form of capital each time it turns over, by using Capital Consumption Allowances, the proceedings of turnover, to hire people actually to produce new capital. Capital may also be disinvested and consumed, or augmented by new saving and investment. None of those is true of land.
The fact above seems simple when laid out overtly, yet economists overlook it in framing tax policy. Nonconvertibility gives a new meaning to the old goal of "uniformity" in taxation. It belies the notion that uniformity makes for a "level playing field," or neutrality in taxation. Uniformity is desirable to avoid "excise tax" effects, or tax-induced misallocation of resources; but those worthy ends do not require uniformity as between land and capital. The Federal tax “reform” of 1986 was informed by the spirit of uniformity, to great applause but with damaging results. Effective rates were raised on new investing (by lengthening tax lives), while basic tax rates (which would catch land income) were cut sharply. It is probably no accident that a recession soon followed.
It is doubtful if uniformity within each class leads to neutrality, either. Uniformity among different land uses seems desirable, yes: if taxes vary with the use to which land is put, they bias the owner against the use more heavily taxed. However, what does that say about taxes on capital? If the tax on a parcel of real estate, including land and buildings, varies with use, it biases the owner against the use more heavily taxed. A uniform tax on buildings is a tax that varies with the use to which land parcels are put. Once we assume, or deduce, or observe, or otherwise conclude that taxes on buildings are shifted to land, then a uniform ad valorem tax on buildings is a tax that varies with the use to which land is put. It has "excise tax effects": it makes owners favor smaller, older buildings against larger, newer ones. Cf. B-6.
A-7. Land rents are subject to common forces that differed from and are generally reverse to those that determine interest rates (the price of capital).
Interest rates around the world rise and fall in sympathy. They are subject to common, interconnecting forces of supply and demand, transmitted swiftly even in past centuries, and today instantaneously.
Land rents, too, rise and fall together in response to common forces. However, the forces are different for land rents than for interest rates, so they do not vary in sympathy. Even though the lands are not mutually convertible, they are subject to common forces, the greatest of which is the interest rate itself. Capital and land are rivals for the same pie, so usually their returns vary inversely. Ground rent equals operating cash flow less interest on the cost of building, and less building depreciation. A rise of interest rates lowers ground rents.
It is hard to see how any forecast of the results of economic policy, or any forecast for investment purposes, could have any value without keeping focused on this distinction. Sometimes it is handled by distinguishing old" from "new" assets or issues. Yet, in general, neoclassical doctrine tells us to meld land and capital in economic thinking of all kinds.
(See selfquizzes on HG for more material.)
A-8. Land price guides investors and determines the character of capital, as capital substitutes for land
High land price guides investors to prefer kinds of capital that substitute for land. Although capital cannot be converted into land, it can substitute for land, and does so when rents and land prices are high. John Stuart Mill long ago pointed out that the structure and character of capital is determined by the level of rents and wages.19 Such substitution is an integral part of the equilibrating function of markets; the human race could never have attained its present numbers and density without it. High wages evoke labor-saving capital; high rents evoke land-saving capital. It is useful to carry this farther, and recognize five kinds of substitutive capital evoked by high rents and land prices:
e. Rent-leading capital.
These are defined and discussed in Section C-3.
2004: These are defined and discussed in B-17, infra
To understand the forces shaping capital investment, one must recognize the difference of land and capital. High land prices evoke substitution of capital for land, shaping the capital stock in particular ways. Viewed positively, this is a central part of economic equilibration, tempering land scarcity. Viewed negatively, it has led historically to boom and bust cycles (cf C-3).
A-9. Land is limitational
As suggested in the Introduction, land and capital are mutually exclusive. Each is also limitational, meaning all human activity requires at least some of each.
Land is indispensable to life, hence to economic activity. The same is generally true of labor and capital, but less "absolutely". Land can exist perfectly well without labor or capital, and support timber and wildlife, but labor and capital cannot exist at all without at least some land, and often a great deal of land. Substitution is limited. It will not do just to have 57 varieties of labor, or of capital. There must be at least some land. Remember, land includes space itself, and a time-slot in it. It includes air and water, the environment and the ecology and all original matter itself. Without land there is nothing.20 Coupling this with the non-reproduceability of land, and its fixity, land is distinctive.
In this they are out of step with general thinking. In France, at least, polls have shown for several years the two most respected and popular figures are the Abb Pierre, who crusades for the homeless, and Jacques Cousteau the environmentalist, who also preaches on the folly of ignoring the limitational nature of land.
There is scope for massive substitution of land for labor and capital, and labor and capital for land. That is, the proportions in which we combine the factors are variable. This substitution cannot, however, be carried so far as to dispense with land altogether: this is the meaning of limitational.21 Piling more capital on the same land is limited by diminishing returns.
It has further been advanced that micro-chips and such use so little land that land is irrelevant. This overlooks that these items are made and assembled and used in plants that spread out and produce toxic wastes, by people who arrive in autos riding over rights-of-way from homes on residential lots. Land prices in Silicon Valley are so high, and space so tight, that plants long since began moving in search of cheaper land in northern Sonoma County, Sacramento County, etc.
Therefore the three factors are always found working in combination, and much of economic theory used to deal with how they are combined. Some of it still does; the rest floats in outer space, perhaps communing with the ghost of Plato.
A-10. Land value is not an economic fund
Economists teach that all economic values are either funds or flows. It is a seductive division, and often useful, but too simple by far. Land value is neither, but a third kind of value, sui generis. Mankind cannot add to it, nor draw from it as from a true fund. Individuals can and do, by exchange. Even nations can, by selling to aliens. Thanks to the fallacy of composition that lets us forget that these are merely intermediate transactions which collectively accomplish nothing. In famine, or war, or capital shortage, society cannot live on land values. These are not accumulations of stores, but merely the present value of anticipated future service flows which cannot be hastened.
Further divisions are distinctive too, in other contexts. Exhaustible resources (excluded from this discussion) could be called "natural funds." Fixed capital, slowly depreciating with time, is a "flowing fund." Soils have additional components. But basic permanent location value, our present focus, is in no way an economic "fund."
SUMMARY AND REPRISE
Land and capital22 are mutually exclusive categories, provided that "exclusive is understood properly.
Capital is fungible in the long run, i.e. every unit or "molecule" is convertible to any other. Labor is slightly less so, and the generations are longer.23
Thus, all capital tends to earn the same rate of return at the margin. There is a "pool" of capital, whose returns are subject to common influences. The labor pool is more differentiated, but still, all wage and salary rates are subject to common influences through the interflow caused by competition and mobility. In the long run, replaceability of capital makes individual "capitals" totally fungible, i.e. perfect substitutes for each other -- but not for land. So it is, too, with labor, without the same perfection.
Land rents tend to rise and fall together, too, being subject to common influences: direct demand, indirect demand via commodity prices, input costs, wage rates, and real interest rates.
B. Major Economic ConsequencesB-1. The origin of property in land is not economic
After land is appropriated by a nation the original distribution is political. The nature of societies, cultures and economies for centuries afterwards are molded by that initial distribution, exemplified by the differences between Costa Rica (equal partition) and El Salvador with its fabled "Fourteen Families" (Las Catorce), or between Canada and Argentina.
Political redistribution also occurs within nations, as with the English enclosures and Scottish "clearances," when one part of the population in effect conquered the rest by political machinations, and took over their land, their source of livelihood. Reappropriation and new appropriation of tenures is not just an ancient or a sometime thing but an ongoing process. This very day proprietary claims to water sources, pollution rights, access to rights of way, radio spectrum, signal relay sites, landing rights, beach access, oil and gas, space on telephone and power poles (e.g. for cable TV), taxi licenses, etc. are being created under our noses. In developing countries of unstable government the current strong man, perhaps hanging by a thread, often grants concessions to American adventurers who can bolster his hold on power by supplying both cash up front, and help from various US and UN agencies from the IMF to the United States Marine Corps.
Ordinary economic thinking today would have it that a nation that distributes land among private parties by "selling to the highest bidder" is using an economic method of distribution. Such thinking guides World Bank and IMF economists as they advise nations emerging from communism on how to privatize land. The neutrality is specious, at best. Even selling to the high bidder is a political decision, as 19th century American history makes clear.
Selling land in large blocks under frontier conditions is to sell at a time before it begins yielding much if any rent. It is bid on by those few who have large discretionary funds of patient money. Politicians, meantime, treat the proceeds as current revenues used to hold down other taxes today, leaving the nation with inadequate revenues in the future.
Apart from such obvious cases, more generally, control over front money, however honestly acquired historically, is a factor separate from the ability to use land productively. This is addressed below, in B-8.
This matter of the origins of property in land is skirted, ignored, obscured, or trivialized by Libertarian (neo-anarchist) philosophers, e.g. the Chicago School, and their lead is followed by the mass of economists today.24 It is the Achilles' heel of these and allied philosophies. One of these, the contract theory of the state, was heavily used to sell Proposition 13 in California in 1978. Howard Jarvis, the author and protagonist, repeated daily that "Property should pay only for services to property, not services to people." "Services to property" he construed very narrowly indeed.
Ownership and tenure rights derive only from appropriation, not saving, investment or production. Capital, by contrast, is owned by those who formed it. Only after that does capital bear much resemblance to land in that they coexist. Standard micro‑economics obscures the differences because it deals mainly with relations of coexistence, ignoring the continual formation and destruction of capital, ignoring time and relations of sequence. Thus it excludes from its purview the differences between land and capital. Micro deals mainly with how existing resources are allocated at a moment in time, not how they originate, grow, flourish, reproduce, age, senesce and die.
b. Privatization is dominated by giveaways and resultant "Rent-seeking, which warps allocation.
Another thing libertarian philosophers must paper over is the
rent-seeking that occurs in the creation of private tenures. They avidly push privatization as the Panacea,
but ignore the process of privatization and its consequences. Private tenure is often granted under customs
that make it a prize for occupying or fixing some capital on land, and
continuing to operate it with "due diligence" ("use it or lose it"). Premature investment, settlement and
development are frequent results, seriously distorting the allocation
of land, labor and capital and contributing to the "Congested Frontier" problem
(cf. B-2, infra.)
The tolerance of neo-classically-trained libertarian economists for such distortions knows no bounds nor shame. A current example in California is their push to convert conditional water licenses into permanent property rights. They would give the present licensees perpetual, alienable property not just in the water, but in past and ongoing government subsidies to build and operate the water distribution system.
c. Inertia takes over after the original distribution, perpetuating and aggravating it.
Inertia, both financial and political, transmitted through generations by inheritance, is a major control over the distribution of wealth and income. How else can one explain their hyper-skewed distributions, in contrast with the normal distribution of most human abilities? Inertia extends the original pattern for generations. More, the advantages given by controlling discretionary funds (those not needed for subsistence) magnify the original political result.
(Mention Marx's "Primitive accumulation.")
(Mention importance of WTA vs. WTP research findings.)
"Positive" economists and Libertarians, who fancy they have found in private property rights a "value-free," apolitical basis for thinking about and structuring society, have to paper over the political origins of landownership. If one's grandfather was a slave when the Land Office was parcelling out Federal lands to the friends and cousins of corrupt Congressmen, one may be excused from believing Utopia will ensue from limiting all future changes to "win-win" Pareto-optimal changes from the inherited status quo. When "offset rights" to pollute the neighborhoods of the poor are granted today to those whose claim to the privilege is their history of polluting, the political basis of property being created currently shines forth unmistakeably, except to those who are hopelessly twisted by rationalizing the existing distribution of property.
WTA vs. WTP survey findings; their relevance and import.
d. Privatization is dominated by giveaways and resultant "rent-seeking,” which warps allocation.
Another thing libertarian philosophers must paper over is the rent-seeking that occurs in the creation of private tenures. They avidly push privatization as a grand Panacea, but ignore the process of privatization and its consequences. Private tenure is often granted under customs that make it a prize for occupying or fixing some capital on land, and continuing to operate it with "due diligence" ("use it or lose it"). Premature investment, settlement and development are frequent results, seriously distorting the allocation of land, labor and capital and contributing to the "Congested Frontier" problem (cf. B-2.)
Some assets that are privatized in this way, dejure or defacto, include England's North Sea oil (where it is called "performance bidding"); water in the 17 western States of the USA, and four western provinces of Canada; the radio spectrum; licenses to pollute air ("offset rights," in EPA-speak); US farmland under Squatters' Rights (1841) and the Homestead Act (1862); US and Canadian railroad land grants; fishing quotas; farm production and acreage quotas; cartel shares; utility franchises with duty-to-serve; etc.
The tolerance of neo-classically-trained libertarian economists for such distortions knows no bounds nor shame. A current example in California is their push to convert conditional water licenses into permanent property rights. They would give the present licensees perpetual, alienable property not just in the water, but in past and ongoing government subsidies to build and operate the water distribution system.25
B-2. Much land remains untenured
Access to land is open by nature until and unless land is appropriated, defended, bounded and policed. No one claims land by right of production; no producer must be rewarded to evoke and maintain the supply; and submarginal land is not worth policing, unless to preempt it for its possible future values, or to preclude anticipated competition for markets or labor. Centuries of human customs have developed around regulating common use of lands with open access.
Tenure control of some land tends to drive the excluded population to untenured land (the "commons"), creating an allocational bias unless all land is either tenured or common. Thomas N. Carver styled this the phenomenon of "The Congested Frontier", and he might have added backwoods. Land which is partly common today includes parks and public beaches, streets and highways, water surfaces, wild fish and game, and some at least of the "wide open spaces" in less hospitable regions. Today there are homeless people for whom life would literally be impossible without some form of access, however precarious, to untenured land. Some of it, ironically, is near the centers of large cities, where the price of land is highest.
No great damage is done if submarginal land is untenured: it won't be used anyway. There may be damage, however, when rentable land is untenured. It attracts too many entrepreneurs with too much labor and capital, leading either to the use of private force to establish tenure - unjust, dangerous, and wasteful – or overcrowding and waste, called the "dissipation of rent," when the average cost of the average firm equals the average product of labor and capital. Fisheries and open range are classic cases.
Some land of high value is untenured or underpriced because consumers resist paying for what they think of as "free" because it has no cost of production, and which nature continues to supply even though the price is too low to ration the land economically. Examples:
It is also possible to legislate and subsidize open access to some kinds of labor and capital services, e.g. public health measures, and education. These differ from common lands in that they are not open "by nature," but by art and public expenditure.
B-3. Landownership imparts superior bargaining power
Labor starves, in contests of endurance; land endures.
A landowner is also a person with labor power. He or she can earn income like any worker. Landownership gives income above that, which gives discretionary spending or waiting power.
In contests with capital, land has the greater waiting power because over time capital depreciates, while land appreciates. Thus landowners (when free of heavy taxation) are noted for their patience. Patience is the essence of bargaining power.
Because land is fixed, more ownership by one person or group means less ownership by others. To expand is to preempt, unavoidably. Thus, the expanding agent necessarily weakens others by the same stroke that strengthens himself. Landownership often gives market power in the sale of specific commodities and services. See B-11.
Land rent, however high, does not raise the rate of return (ROR) on investment in land purchase. It may sometimes lower ROR in the formation of true capital.
If the return to capital rises in a place or an industry, capital flows in until the rate of return on new investment falls to the common level. The excess returns to capital are competed away. When land rents rise, on the other hand, the excess returns are imputed away, meaning the land becomes and remains more valuable. Arbitrage pushes up land prices, using the interest rate borrowed from the market for capital where it is determined. This creates an illusion of a return that results from buying land, but acquiring land does not build the asset that yields the return. The return comes first, and exists regardless of what is paid for it; the price derives from the return (cf. A-4).
In terms of ordinary cost theory, land price is part of Fixed Cost (FC). As demand rises, average fixed cost (AFC) rises enough to soak up all excess returns. As it is sometimes put, land's "cost" is not price-determining, but price determined. Calling it a "cost," and lumping it with other costs, has tended to hide this difference in obscurity, ambiguity, and a touch of mystery, which are the basic tools of sophistry.
If land rents do affect interest rates it is not by increasing the productivity of and demand for capital. It is likely to be the reverse: high asking prices for land can cut into and reduce the return to capital. In short, high building prices raise the demand for investment; high land values lower it.
Whether high land values do or not reduce returns to investors depends on whether they are properly high -- i.e. they reflect the high productive value of land -- or overpriced, in a cost-push phenomenon. Over-pushing building rentals does happen, but vacancies result and correction is likely, especially when the building is on the steep gradient of its depreciation and obsolescence curves.
Overpricing land titles is common - witness all the vacant land in and around cities. It may go on for years before it is recognized and corrected, especially when land is on the steep gradient of its appreciation curve, and near an edge or ecotone (zones of change of land use) of conversion to higher use. Ordinary theory obscures this, to the extent that it treats land at all, by calling land rent a "residual." Landowners in real life are not so passive: they get paid up front when they sell to builders. (Demanding high ground rents in long term leases to builders is also common and has similar effects.) When this occurs it lowers the rate of return on building. Where the land is paid or contracted for up front and on fixed terms, the building only gets the residual.
High land values may also affect interest rates indirectly by reducing saving and the supply of capital. The existence of high land rents and values, like the ownership of slaves, tends to satisfy the need for accumulation of assets without any actual capital formation.
d. Public policy needs to promote capital formation but not land creation.For creating land, thrift is not needed, nor can it avail: no man can create land. Thrift creates no land, and the value of land, however high, stimulates no thrift. Land rent may be taxed heavily without discouraging capital formation. Indeed it would certainly encourage capital formation to lower the level of land prices, because there is a diminishing marginal utility of assets to private holders. The loss of land values would stimulate new saving to make up the loss.
With capital the sequence is that persons save to form capital, a lump sum, which then yields a service flow. Capital formation precedes and causes the service flow. With land the sequence is reversed. The service flow is a free gift which simply exists. The buyer does not create it, nor cause others to create it; he simply acquires it. The expected service flow is then converted by arbitrageurs (economic men) into a lump sum present value. That process is called "capitalizing," i.e. making land superficially resemble capital for purposes of exchange. However, it is land price that adjusts to a given rent, rather than rent's being determined at a level sufficient to reward producing the asset. The interest (or capitalization) rate at which rent is converted to price is determined by the supply of and demand for real capital, not land.
B-5. Land rent is a taxable surplus
a. Relative elasticities.
Land rent is nearly identical with taxable surplus. This follows from simply observing that the supplies of labor and capital are highly elastic, while the supply of land (within any given taxing jurisdiction ) is totally inelastic, because a "jurisdiction" is defined as a specific area of land.
François Quesnay and the “Physiocrats,” and their fellow-traveler A.R. Jacques Turgot, deduced from the above that almost all taxes, whatever the nominal base, are shifted to land rents, and lodge there. Market forces tend to equalize all AFTER-tax returns to labor and capital, because of their mobility or, in the case of some labor, the inability of humans to survive on less than subsistence wages.
As a corollary, if there is no rent there is nothing to tax. E.R. A. Seligman in one of his exhortations against the single tax, warned that a marginal community --one on land of no value -- can have no tax base if it taxes only land. However, this hypothetical community can have no tax base anyway. Whatever labor or capital it tries to tax will leave, or never arrive, because their supplies are elastic.
Capital will only appear to bear a tax if it can shift it to land in the form of lower rent, or a lower purchase price. If rent and land values are already zero, there is nowhere to shift a tax. Mobile factors will not bear it, but turn away. Customers will not bear it, but buy elsewhere.
Seligman does not consider the interesting possibility that public services paid by taxation might create the very rents that are taxed to support the public services. That complex question would make an interesting book, but one too long to insert here.
b. The surplus is much more than usually stated.The writer has dealt with this elsewhere (Gaffney, 1970, 1993), and is currently writing a book on the subject. Cf. also B-12. The failure of modern economists, whether neo-classical or heterodox, to acknowledge the Himalayan Range of land values in their faces, and to reckon its role in theory and policy, is denial and delusion on a scale at which one can only marvel.
B-6. Uniformity in taxation between land and capital is not neutral
a. Land and capital are non-interchangeable, and mutually exclusive.
Refer back to A-6. Land is not convertible into capital, nor vice versa. Individuals may exchange one for the other but that does not change the quantity of either.
The fact of non-convertibility gives a new meaning to the ordinary concept that "uniformity" in taxation is neutral and desirable in all cases. Uniformity is desirable to avoid "excise tax" effects, but that end does not require uniformity between land and capital, only uniformity within each class.
(Refer to Ramsay rules, citing standard texts.)
However much the capital be taxed, it will not be converted into land. By definition, it cannot be. Likewise, however much land be taxed, it cannot be converted into capital.
It follows that "uniformity in taxation" only has merit within each class, not among them. The ideas that we should tax all income uniformly, or all property uniformly, have no merit from an efficiency standpoint.
Many State constitutions are perverse in this regard, allowing discrimination among uses of land, but not between land and capital.27
Putting it in substitution terms, taxing capital induces substituting land for capital. This occurs simply because capital is taxed, however, and not because it is taxed more than land. It occurs whether land is taxed at a higher rate, the same rate, or no rate at all.
For neutrality, the rule then is to avoid taxing anything except land. Nonuniform taxation is necessary to avoid taxing capital, and thus to avoid nonneutrality. The ordinary argument for uniformity gets it backwards.
The only way to tax capital uniformly is to exempt it all. The way to exempt it all, without going completely anarchist, is to raise the rate on land, which can be assessed uniformly.
Note irony. What are pushed today as taxes on "consumption" exempt land consumption.
Sales taxes and VATs in practice tax many things in cascade, and others not at all. They bear on capital formation in human form, and exempt consumption of land's time-slots. To call them what they are, they are taxes on exchange, and the necessities of the poor, the middling, and parents of all levels struggling to create and maintain human capital.
B-7. Land values are hypersensitive to discount rates
The sensitivity of present values to discount rates increases as the value being discounted. Land values are discounted from more remote future values than are values of most capital, even most durable and "fixed" capital. Consider land yielding an expected constant cash flow: let the interest rate double and the present value is halved. Compare the present value of a steer to be slaughtered in one year: let the interest rate double from 5% to 10% and the present value drops from .95 of slaughter value to .91.28 Even that overstates it a lot because we haven't accounted for the feed bill, but never mind, the point should be clear.
Let buyers expect land's cash flow to rise annually by a growth coefficient, G, and the valuation formula is cash flow divided by the interest rate minus the growth rate (I-G), rather than I alone. Now let the interest rate double, and the present value is cut to less than half.
Or let land be yielding a nominal current cash flow and to be held in anticipation of a higher use to begin 10 years down the road, and thirty years after that to be renewed for an even higher use. Let there be a whiff of oil, or the floating value of a shopping center, or the possible extension of a freeway and a new water supply paid by others. Let there be a fear (or hope) that Washington will debauch the currency sometime again in this century, or that another Howard Jarvis will cut land taxes some more, or that future building costs will fall: any and all of these, which are common and familiar expectations, make present values of land more sensitive to discount rates than in the simple basic capitalization model which is based on assumed constant cash flow in perpetuity.
Expectations like those denoted above by G, or like the anticipated higher future use referred to, are "a state of the public mind" (Richard Hurd, Principles of City Land Values). They are incapable of proof or disproof in the present and, whether proven true or false in the future, will have lost relevance, to be replaced by new expectations of new futures that unfold endlessly as time passes.
B-8. Land markets are dominated by access to long-term credit
Individual bidding power is hypersensitive to one's Internal Interest Rate (IIR). This follows from B-7.
Carrying cost is interest on the price of land. It varies with one's internal interest rate (IIR). For those with high IIRs, the carrying cost of land normally exceeds cash flow. Otherwise put, cash flow from land seldom covers carrying cost, while cash flow from depreciable capital covers more than its carrying cost because it normally has to be priced low enough for cash flow to cover both interest and depreciation. As to inventories of rising assets like steers or timber, they are like zero-coupon bonds: there is no cash flow before sale, but the famine leads to a feast of total recovery.
Since land lasts forever while demands for land grow, the normal expectation over long periods is that ground rents will rise. Present land value includes the discounted values of expected higher future rents. This makes current land values very high relative to current cash flows, which are less than expected future flows. In stock market terms, the Price/Earnings ratio of land is high, like that of a growth stock. This is more than an analogy, since a large share of the assets of corporations consist of land. In the USA, corporations are the major landholders.
Because of the difference in carrying cost the financially strong add land to their holdings to a lower margin of productivity than prevails on holdings of the financially weak, whether we measure productivity in cash flow or service flow. This is a factor independent of and in addition to the fact that the financially strong likely place a higher current value on service flows (i.e. the amenities of land) of given objective quality.
It is often reinforced in practice, too, by the greater political power that accompanies financial strength. The combination of factors may lead the land market far away from anything approaching an efficient equimarginal allocation of land among competing firms and households, to such a degree that traditional micro theory loses much of its explanatory power and the market becomes a travesty of the Platonic ideal in the textbook.
B-9. Control of land gravitates to financially "strong hands"
29. For those unfamiliar with the American township survey system, as "section" is 640 acres or one square mile; a quarter is 160 acres.
Those with existing cores of rent-yielding land -- “existing nuclei” -- enjoy a continual flow of discretionary funds they can use to buy more land. The advantage of a head start snowballs over time.
Buying with equity funds is only the beginning. Land is the basis for extending credit. The "sections" go to the banks for accommodation to buy the "quarters." As Rainer Schikele wrote, "The basis of credit is not marginal productivity, but collateral security." A major factor giving one a good credit rating is the prior ownership of land.
Thus, owning land is not just dominated by, but also dominates access to long-term credit. Here is a positive feedback loop: it takes good credit to buy land, and prior ownership of land gives one good credit. Those already owning land have access to more land at a lower carrying cost than those trying to enter the market from poverty. The result is a tendency for land to agglomerate in the hands of the financially strong (cf. B-8).
Just why some should want to expand so much as to be "alone in the midst of the earth" has puzzled man gentler souls than Isaiah. Thorstein Veblen never turned his acidic irony to better account than in his last book, Absentee Ownership, describing acquisition for acquisition's sake:
30. The Latin sacra means either accursed or holy, the emphasis depending presumably on whether described by a critical observer or one possessed. "Fanatical" seems to capture the double-edged meaning being relished by Veblen. It should give pause to many modern econmists with their weakness for treating self-interest as The Holy Spirit.
As Veblen taught, what is true of Nebraska sections and quarters is equally true of giant and small world corporations. The worldwide merger mania of the insatiable '80s followed the same pattern. Beneath the corporate veil, most corporations are large collections of real estate: industrial, commercial, agricultural, mineral, transportation, communications, and utility real estate.
What concentration means for bargaining power has been foreshadowed in B-3. What it means for market power is treated in B-11.
B-10. Land markets are sticky
Land sellers, compared to sellers of other factors, are too weakly motivated to make very efficient markets. In the basic sense, the land market is efficient if it guides land to its highest and best use, yielding the most economic rent. Time was when that would go without saying, but the semantic cleansing of theory has muddled it up. I do not use "efficient market" in the tautological sense of some rational-expectations theorists, which I have heard from a Rochester economist, wherein markets are efficient almost by definition because all agents are assumed to know what they are doing, and outside observers are not allowed to question it. Neither do I use efficient in the arbitrage sense, where a land market is called efficient if individual buyers of land make a reasonable return compared with their alternatives.32 I am looking at basic social efficiency. There are many reasons why land markets fail.
Land is similar in this respect to capital. But capital also suffers from depreciation, obsolescence, spoilage, theft, and vandalism, and requires outlays for maintenance, protection, insurance and storage. Labor services also perish with time, when labor is unemployed; but unemployed labor also starves. Thus seller motivation is much higher for labor and capital than for land.
But the flow of land service may also be stored in a way peculiar to itself. Landholders may defer permanent improvements while land "ripens" into a higher use, higher enough to repay with interest the loss of one or more years' rent flow.33
Strenuous efforts are made by some economic theorists to rationalize land withholding on these grounds. "Rational expectations" theorists have developed a paradigm wherein any investment decision is presumed rational and socially benign, to know all is to forgive all, and the burden of proof is on anyone who questions an individual landowner's behavior. Whether that kind of rationalization will long succeed, or whether widespread "holding for the rise" will again be recognized as evidence of market failure, there is no doubt that it occurs on a grand scale, and much land is thus held back from current use.
Withholding is also rationalized as waiting for greater certainty. This involves a fairly transparent fallacy of composition (although it seems to be opaque to those economists who make much of this point). The waiting landholder imposes uncertainty on others who are waiting to see what he will do, and of course vice versa, such that uncertainty motivates waiting, and waiting generates more uncertainty, in a vicious "positive feedback loop".
Waiting landholders collectively also impose costs on the public, which has at the very least a prior investment in national appropriation and defense of the land, and usually heavy investments in public infrastructure which await private response. It is a situation where the gains of waiting accrue to
Land rent is not wiped out by competition. Instead, it is imputed away, silently disappearing into "Fixed Cost". Higher demand for land in general evokes no supply response: rather, it simply raises the whole structure of rents. There is usually increased supply of the gross produce or service from land owing to more intensive use, but it comes from the same land. The additional output results from increments of labor and capital applied to the same land. Cf. B-4.
The most favorable case for supply response is where the growing use is of high value and the shrinking one of no value, as with a city growing out into a desert. Here the change of land use is even tantamount to increasing the aggregate supply, it is said or implied by some Chicago School theorists.
One problem with such a model is that deserts do not spawn great cities: even Denver, Phoenix, Albuquerque, Salt Lake City and Los Angeles all developed in oases of intensive farming. As cities spread they destroy part of what they serve and what serves them, and the reverberations ripple out vastly. Land boundaries are common and interdependent, so a change in one ecotone entails "repacking" entire regions, a long, sticky, disruptive process indeed. Expanding cities send out shock waves into the surrounding farms that travel through the entire hierarchy of farm land uses, as higher uses displace lower uses, from market gardens down to sheep grazing. Even grazing is not the lowest use: it then pushes on forestry and recreation where it finally meets the wrath of the Sierra Club (with headquarters in downtown San Francisco and offices in Washington, D.C.). Growing cities also destroy part of the natural beauty that many people value so highly that they devote their lives to protecting it.
The high marginal cost of adding to spreading cities, and the low true net value of the additions, are concealed, in our culture, by an elaborate and pervasive system of subsidies and cross-subsidies built into our institutions and political power structures. These drain the old centers to feed the fringes. In a systemwide accounting we find the true social cost of urban sprawl as we know it today to exceed the gains at the margins. We are not so much adding land to cities as wasting capital, dissipating central rents to do it. Thus the private rent gradient and resulting land-value gradient that we observe in the marketplace is much flatter than the true gradient that is hidden under the subsidies. Even so, the visible gradient remains impressive: values rise to $2,000/psf in San Francisco, Chicago and Manhattan, and $25,000/psf in Tokyo.
Land of rare and limited qualities is often the basis of market control: retail sites, rights-of-way, rare ores, water rights, are familiar examples. Even land of less rare qualities is often used for market control. American farm output is controlled by means of acreage limitations; Texas and now OPEC oil production by oil well protates; and so on.
There are few highly motivated sellers, as there are motivated sellers of spoiling produce and obsolescing computers and vehicles. Median home-owners are motivated, when transferred to another region. Few other land sellers come close to that degree of motivation (and the median home represents more capital than land). Capital depreciates; goods spoil and obsolesce; idle labor starves; but land silently rises in value.
The aggregate of all land changes hands slowly, with one or two percent turnover of ownership annually (measuring the stock by value, not number of parcels - smaller, cheaper parcels turn faster). But buyers often need adjacent land, or land in particular districts or with particular qualities, and find little or no land on the market, or land controlled by one seller.
The slow ownership turnover cited above applies to total real estate, i.e. land including any buildings on it. Ownership turnover is even slower for bare land. If the average building lasts 50 years, only 2% of the land is available for re-use in any given year. Only a fraction of that 2% is for sale; the rest is renewed by the same owner. Whoever wants to buy available land in any particular area is unlikely to be faced with the "many sellers" premised by the competitive model.
The composite result of individuals' buying for future contingent need is that the market in raw land is turned to glue. It ceases to serve the median person in time of need. The effect is a species of vertical integration and, like all vertical integration, it destroys the free market in raw materials and vastly inflates the aggregate need for holding raw materials. This is because the pooling effect such as the market provides inherently. That is, the grocer obtains, stores and keeps a wide variety of food and sundries on tap for thousands of customers. Lacking a grocer, each customer would have to maintain her own stores, and the aggregate required would far exceed that in the common grocery store. A good land market would likewise keep land on tap for the contingent needs of all, greatly lowering aggregate needs.
Straw buyers and front men are used to keep principals and their intentions secret. Speculators are everywhere, trying to assemble large plots or hold up other buyers. Whole districts are held by anonymous absentees; buildings deteriorate, neighborhoods lose their natural leaders and stabilizers, and communities disintegrate leaving slums and blight, crime and arson, public charges and vandalism.
The sum of those factors makes for an inefficient market in land titles. Everyone who can tries to acquire land for his own future expansion. Timely subdivision may be foregone in anticipation of future assembly problems, skipping an entire generation of optimal land use. Neighbors adjusting lot lines have only each other to deal with. Aggregate landownership is highly concentrated because of the small numbers who can invest for deferred yields; the number of sellers in one district or for one use is more narrowly limited because of spatial immobility and low turnover and impossibility of new land creation. Financing is especially difficult because the asset is not self-liquidating. Many holders are waiting for the rise, and/ or for greater certainty to be provided by the advance commitments of others who are in turn waiting for them. Net result: wasted, underutilized land.
A large share of the more valuable land in cities is held by estates. Public and eleemosynary [non-profit] holders are preferentially tax exempt and often without any visible motive to economize. Water licenses are held subject to "use it or lose it" traditions leading to appalling waste. Broadcasting/telecasting licenses are highly political. And so on. Only a resource with the characteristics of land could be subject to such a wide range of non-economic pressures.
B-11. Land is a major basis of market power
We have seen that landownership conveys superior bargaining power (A-?), accretes around existing nuclei (B-9,a), and is highly concentrated (B-9,b). We have seen markets are sticky. It follows that landownership is a natural basis of market power.
In the region of the mind, the thing possessed may be shared by all with no diminution to anyone. No one's pleasure In Shakespeare, or Beethoven, or understanding physics is any less because at the same time millions of others have the same pleasure. Art, letters and science are the common property of mankind, open to all who care to acquire them. The creative producer's pleasure is in proportion to the number with whom he shares. The gratification is from sharing, not excluding. The contrast with landholding is nearly total.35
Amassing claims on wealth by creating and producing is not, therefore, a threat to others. Amassing capital through saving does not weaken or impoverish others. Producing goods does not interfere with others' doing the same. One producer may drive another from a particular limited market, but glutting one market increases real demand for the products of other markets, and raises the real value of others' incomes by lowering prices. Amassing land, however, has to deprive others, both relatively and absolutely. Concentrated holding and control of land, therefore, have always been threats to the well-being of those left out.
Conversely, the only way the landless, e.g. in South Africa, can get land is from those who now have it. "Growth" is often advanced as the solution to maldistribution, injustice and poverty, but that is mere temporizing because land does not grow. When production and demand grow, land rents rise. Of land it is starkly true, "the problem is not production, but distribution". There is no production; only distribution.
Preemption is not always just a by-product of expansion; it may be the main point. For example, in 1993 Builders' Emporium, a large chain of California hardware stores with large parking lots in good locations, closed down and sold out. The sites were bought up by the largest grocery chain in southern California, Vons Company. According to news reports, this is "a shut-out strategy against competitors." Vons will convert 6-8 Emporium stores to Vons' markets, and "hold onto the others until commercial rents rebound -- then market them to non-rivals."
Salomon Bros. analyst Jonathan Ziegler, far from being shocked, praises this as "ingenious." "You're controlling who's in your market area." Ralphs, another grocery chain, had been looking for sites and is now shut out. The stores remain empty today; the land idle.
At the same time, the two largest warehouse retailers in southern California have merged and shut stores. These are Costco and The Price Club. In a third case TCH, the parent of Thrifty Drug Stores, is buying up PayLess Drug chain from its parent, KMart, making a chain of over 1,000 stores. They are shutting many of the stores. An independent retail consultant believes they are shutting them as part of the sale negotiations.
The social purpose and rationale for private property and land markets is to get land into its best use. When preemption overrides use, market failure is total; private property is discredited.
Land with differentiated special qualities is fixed, e.g. land on Wall Street, or land suitable for growing macadamia nuts, or unloading ocean vessels, or relaying radio signals; or residential land within the New Trier Township High School District, or with ocean views and breezes. Substitution is generally possible but only at higher costs, resulting in rent gradients out from the best locations. This phenomenon is well studied and associated with the names of Von Thunen, Ricardo, and many modem location theorists.
This quality makes land a natural basis for oligopoly control of markets, or attempts at control. Land bearing certain minerals, like diamonds or oil, is fixed and limited, in spite of new discoveries and technologies. Sites most suitable for refining oil are limited: they must be near markets, with access to cheap water transport and pipelines, with "offset rights" to pollute air, with "grandfather rights" to endanger or downgrade surrounding residential lands and occasionally spill oil, with access to rails and a freeway system and a labor pool, with vast backlots for tank farms, inside supportive political jurisdictions, and so on.
The fixity of land also lends itself to stability of association among oligopolists. People come and go; capital turns over, flows in and out; corporations, partnerships and syndicates are collapsed, merged, refinanced, bankrupted and reorganized. Land remains: it is always in the same place, unmistakably identifiable and findable. It is the permanent, underlying resource whose control is always the objective of the shuffling and roiling and strife above it. Its owners, whoever they may be, will reliably join and support the local employers' association and their respective trade associations.
Bargaining power increases with the number of options one has. A large landowner with a chain of holdings in different jurisdictions is positioned to bargain, to play off one against the other. Thus, the Disney Corporation, 1991-93, considered rebuilding and expanding Disneyland at its current site in Anaheim, or in Long Beach where it had tenure over another suitable site. Using this leverage it won concessions from both cities, "finally" choosing to expand in Anaheim. It has yet to do so, however, and nothing is really final. Disney has many other sites around the world.
Likewise, land is a basis for oligopsony power in local labor markets. A city's labor pool is often faced with a local employers' association whose membership is limited by the amount of industrial land within reach of the labor pool. Migrant farm labor is faced with statewide employers' associations who have the advantages of limited numbers, wealth, ancient roots and stability. Labor unions that organize a local plant are faced with the threat of the "runaway shop", or merely reallocating work among plants, when the employer owns plants elsewhere.
Custom has dulled us to it, but a corporation is a pool of separate individual landowners bargaining in concert. A century ago, corporations and limited liability were viewed with suspicion and apprehension. Today, hundreds and thousands of separate landowners pool their corporate strength against labor, as a matter of course. Some employees bargain through unions, but not as a matter of course, and hardly ever with international options. In the US, less than 20% of the labor force is unionized, yet many, probably most economists treat labor as the only threatening monopoly. They see corporations as benign; a prime cause carried by many economists today is to eliminate the corporate income tax completely. Would we saw such support for eliminating the payroll tax, the most obvious cause of unemployment.
e. Land is the basis of cartels.
There is too much farmland to permit of monopoly control through private action. However, production controls are exerted through public action and force of law. These controls operate through control of land, limiting the allowable acreage in certain crops. Seldom is there any attempt to control other farming inputs like labor, fertilizer, farm capital or pesticides.
The best-known world cartel, OPEC, also works through control of a natural resource. It is important in its own right, obviously, but only one of a whole genus that it represents so conspicuously. There is a tendency for cartels to overexpand under the price umbrella they support, and then collapse, taking with them a lot of wasted capital. The effect of short-run monopoly may thus be long-run instability (cf. B-17). Either way, the effects are harmful and impoverishing.
B-12. Land income is much greater than the current cash flow
With land held for appreciation there is no cash flow to disclose the high values and the steady accrual of gains in wealth. This quality of "silent accrual" is found in land surrounding cities, or growing retail centers, as well as in land considered potentially mineral-bearing. Other land is valued for expected higher future cash flows in its present use, or some higher use to come. Some land is valued for future "plottage" increments from assembly, or "negative plottage" from subdividing.
Professors Haig and Simons have given their names to the standard definition of income which includes unrealized appreciation of durable assets like land and corporate shares as current income. Stock brokers and real estate brokers habitually do the same thing for the trade. They may appear to question it when lobbying for tax breaks, at which time some say it is "double taxation" to tax both current cash flow and appreciation. When selling stock or real estate, however, unrealized appreciation is unequivocally touted as current income, and correctly so.
Some even deny that appreciation should be taxable income at all. Yet, no one denies that depreciation should be a deduction from current taxable income. This asymmetry and glaring contradiction generally passes unremarked. It could only survive if never challenged in the profession, which apparently it is not. "Land," with its tendency to appreciate, is not in the abridged lexicon.
It is common for economists to write of the "imputed income of durable consumer capital." especially owner-occupied houses, and occasionally to persuade some political candidate to advocate including their imputed income in the income tax base, or at least to end the deduction of interest and property taxes paid on house values. Those making such proposals, unfortunately, fail to exercise reasonable care in distinguishing houses from land. Much or most of the non-cash service flow received from consumer capital proper is not income at all, but two other things: a return from operation, maintenance, and upkeep; and a return of capital. Depreciation and expenses offset more than half the service flow from most owner-occupied houses, especially middle-aged buildings on the steep slope of the depreciation curve. The service flow from land, on the other hand, is pure income.
The measure of this imputed land income is not subjective nor fuzzy. It is interest on the market price of the land, a measure of its opportunity cost (cf. B-14 and A-2). Alternatively, it is the periodic ground rent on comparable lands.37 This could easily be included in the base of the present income tax, converting it in one stroke into a national land tax.
37. In 1992 the US Congress passed an energy policy law including a provision that the worker who receives a parking space from his or her employer must pay income taxes on its imputed value in excess of $155/month. The imputed value is simply what nearby or comparable parking lots charge. Employers are supposed to figure the value and include it on W-2 forms, beginning with 1994 taxes. (David E. Rosenbaum, 1994, "IRS eludes parking tax law." New York Times News Service. Riverside, California, The Press-Enterprise, 24 Feb., p. A-12.)
Forest land yields cash only once in decades. Some land is valued mainly for ancillary benefits like the preferential access it gives to adjoining lands for grazing, recreation, water rights, waste disposal, information gleaned from mining, etc. Other land is held for its contingency value, for example for possible future expansion. Some is held preemptively to freeze out competition, and some is used (under current US income tax laws) to yield non-cash tax shelter benefits.
Part of farmland value is an amenity, especially of course in pleasant places. The value of lands held for the owner's recreational pleasure is non-cash. Part of the value of media ownership -- spectrum or newspaper sites -- is power and prestige. Business sites in Newport Beach give access to water recreation; in Cambridge, Mass., to intellectual stimulus and hobnobbing. The list of non-cash service flows from land is much longer and is limited only by one's observation and insight.
A 19th Century Briton put it like this.
"The objects which men aim at when they become possessed of land in the British Isles may, I think, be enumerated as follows: (1) political influence; (2) social importance, founded on territorial possession, the most visible and unmistakable form of wealth; (3) power exercised over tenantry; the pleasure of managing, directing and improving the estate itself, (4) residential enjoyment, including what is called sport; (5) the money return -- the rent."
-- The 15th Earl of Derby, 188138
38 "Ireland and the Land Act," Nineteenth Century, October 1881, p. 474, cit. Roy Douglas, p. 17
In Ireland, during rent wars, boycotts, etc., landlords "had long decided that Ireland would yield few of the spiritual delights of land ownership." This resulted in lower prices for Irish than English land.
Less drastically, we might just ask what the owners would sell England for? A common way to trivialize land values is to play "what if' the owners tried to sell it all at once.39 What if, instead, we went to buy it all? Much of it has been off the market for centuries, with reservation prices effectively infinite.
B-13. Consuming land means preempting its time
To consume most goods and services is to use them up. Land is not used up. "Consuming" land must have some other meaning, therefore, than the intuitive and common idea that consuming means turning-to-waste. To consume land is rather to preempt its service flow without impairing its substance. To consume land is to occupy it for a time-slot, which may be as brief as beating a red light or (rarely) as long as the pyramids last.40 After us life goes on, on the land once left to us which we then leave to others. "Time-sharing" was not invented by the holiday industry but is inherent in the nature of land and life.
40. The other six "Wonders of the Ancient World" have all disappeared without a trace. Relative to land, human works are evanescent. "Like snow upon the desert's dusty face, lighting a little hour or two" they are gone.
How shall we measure land-consumption by owners, where no rent is paid? Is it purely subjective? Does it vary with the owner's mood and health? It is simpler than that, and fully practicable. The essence of consuming land is preempting the time-slot from others. Thus, holding land without using it, or using it below capacity, is a form of consumption. The measure is the market opportunity cost of land, i.e. the price times the interest rate.
Holding an urban site has been likened to holding a reserved seat at a play, sporting event, or concert. The ticket holder properly helps pay for the event, whether or not he is there to enjoy it. As a result, very few paid customers fail to show up. Likewise, people who pay cash rent for land seldom leave it vacant. Doubtless if people paid regular cash taxes to hold land, they, too, would consume (preempt) less.
Proponents of "consumer taxation" almost universally overlook this point. I am not aware of one who has proposed including land-consumption in the tax base. Aaron and Galper, propounding a "cash-flow tax," explicitly allow for letting each succeeding owner expense land purchase, effectively exempting land rents from taxation 100%.
Theirs, and other proposals, and consumer taxes actually imposed now and in the past, bear heavily on the necessities of median families. We deride the salt tax of the French ancien regime, and of pre-Ghandian India. We recognize them as instruments of tyranny and class warfare, even as we tolerate modem legislators who impose comparable burdens on ourselves, and economists who rationalize such taxes by belittling the necessities of life.
Doing so, they compound the deception in the label "consumer taxation". Much of what is taxed in the name of taxing consumers is actually used for capital formation: human capital formation. The same economists who say human beings are or contain capital, turn around and tell us to tax the formation and maintenance of such capital, by calling it "consumption'. Coupling this with their proposed exemption of land-consumption we have the ultimate victory and application of semantic cleansing. Inconstancy, thy name is -- neoclassical economist?
B-14. Land's rent is its opportunity cost, regardless of use
Land is a prior claimant on the product. This has been obscured by calling rent "a residual." Land income is not a residual, but a prior claimant. This means land rent is a much larger share of national income than national. accounts presently show.
The unreaped harvests of idle land flow like water wasting through a desert into a salt sea. Lost water may sometimes be useful downstream; lost time never returns. To keep others from using a time-slot is to consume it.
A great deal of land in fact is not allocated to its highest and best use. The value of preempting this land is the highest and best use that might have been made of the land preempted. That is the economic cost. The land is not responsible if the manager fails to realize its value at optimal capacity. Neither are the persons who are excluded. Only the preemptor is responsible, as a manager. This person is the residual imputee who deserves credit for performing above par and blame for failing below.
Most economic theorizing has failed to bring out this point. The tendency is to treat ground rent as a residual, a waste basket for all the errors and dereliction of responsible economic actors. (Note dereliction of those who say cost is opportunity cost, but fail to apply that properly to land, when estimating its value.) This has resulted in greatly understating the value of land relative to other factors of production. Institutional and social factors, too, often obscure the opportunity cost of land.
This is a case where theorizing lags behind practice. In dividing value between land and a building affixed to it the standard practice of appraisers, and speculative buyers too, is the "building-residual method." The land is appraised as though vacant; the building gets the remaining value, if any. The building, once attached to a specific site, loses the mobility of place and form that fluid capital possesses and has no opportunity cost but scrap value, which is often negative. Land, always lacking mobility of place, retains mobility of reuse because of its versatility, permanence, and irreproducible location.
B-15. Land value is hypersensitive to the environment (Canary in the mine)
Because of fixed location land value reflects its surroundings. Good and bad spillover values lodge in land rents because they are locational and the affected land cannot escape the bad, nor avoid sharing the good.
B-16. LAND USES THAT STINT ON LABOR SPELL UNEMPLOYMENT
B-17. THE LAND-SURFEIT OF SOME, WHEN UNCONSTRAINED, SPELLS HOMELESSNESS FOR OTHERS
C. Land-driven Booms and Busts
C-1. LAND VALUATION IS SUBJECTIVE
The value of durable capital is based on expected future cash flow, and so is that of land, but there are three big differences at least.
There is too little in objective reality to limit expectations. Many buyers have little understanding of valuation theory. Loan officers should be better trained than naive new buyers, but the recent history of U.S. and Japanese banking suggests otherwise. Without understanding, there is little basis for pricing other than the behavior of other buyers and sellers. "A nerd follows the herd." But then valuation is purely circular and loses its anchor in reality. The history of land values, accordingly, is one of manic‑depressive mob psychology with swings of high amplitude.
Suppose one decides to consult a professional real estate appraiser, to make sure he does not overbid. What do appraisers do? They locate comparable properties that have sold recently, and advise you accordingly. The buyers of those other properties hired appraisers who did the same thing. If there is a building, he tells you it is not worth more than its reproduction cost, a known figure in the trade. With land, however, value is based mainly on what others are paying, i.e. the general opinion. Everyone is setting his watch by everyone else's.
There is one important party whose following the herd will actually restrain the herd, and temper its excesses. This party is the assessor of land taxes. If land assessments rise with a herd mania, land taxes will also rise, dashing freezing water on the mania and stabilizing the market. Here is compensatory fiscal policy in the best and original sense. This can really work. It did work in the Progressive Era, 1900-17, when reliance on property taxes was at an all-time high in the U.S. The major crash that was "due" in 1913 or so never happened.41 Several factors were at work, but this was clearly a major one.
FRAGMENTS TO BE WORKED IN......
a) Perfect knowledge does not mean omniscience. "Rational expectations" cannot paper over this problem.
b. Pricing is subject to herd behavior, positive feedback, and circular reasoning.
a. Cost of production places no limits on land rents and prices, neither a lower nor an upper limit. Rents and prices start at zero, and rise without limit over time as demand rises. Spatially, prices are near zero in the tundra, and rise to an estimated $1.3 billions per acre (sic) on the Ginza of Tokyo, although both locations alike are free gifts of nature.
b. There is always a marginal and submarginal supply, the "extensive margin." Usually it is free, or virtually so. Some of it is untenured, at least de facto.
During a land boom, financial institutions lend freely on land. After a while, mortgages secured by real estate (either directly or through the corporate veil) become the major asset of banks. Credit follows collateral, and then helps boost its collateral value in a positive feedback loop. In periods of high and rising land prices, borrowers get used to pledging land to secure loans, and lenders get used to demanding it.
The credit is often used to buy still more land, to reserve for possible future use and at the same time to withhold from competitors. Such concentration and market control form the ugly side of extant western "capitalism, when enterprise degenerates into greed and acquisitions supplant innovations.
As Rainer Schikele wrote, "the basis of credit is not marginal productivity but collateral security."42 He meant that lenders are concerned not with the productive use of their loans, but with the security provided by borrowers' ownership of old wealth.
As Keynes put it in his General Theory, there are two kinds of risks: investment risk proper, and lender's risk. Investment risk depends on the productivity of new capital; "lenders' risk" depends on borrowers' old collateral, like land. The social purpose of investing is to create capital; the individual purpose is to buy income with security. The second purpose leads lenders to lend to the rich in preference to the productive. The principles are at odds; the productivity principle is clearly better from the viewpoint of basic micro efficiency.
The marginal productivity basis of lending is also better in terms of macro stability. Flows of credit dominated by cycles in the land market are highly unstable. The savings and loan industry calamity in the US in the 1980s exemplifies and should settle the point. It has many precedents, going back at least to the golden age of Florentine banking, the Dutch Tulip Bubble of 1634 and the French-English Mississippi and South Sea Bubbles of 1720. The rule has been that following each collapse the hung over lenders woke up penitent. Reacting to the excesses they adopted something like the English Banking School philosophy of avoiding real estate loans and sticking with self-liquidating commercial loans, only to fall off the wagon in the next land boom thereby helping to repeat the cycle. How easily one generation forgets the hard lessons life taught the one before. "When will they ever learn?"43
C-3. Land markets are prime causes of instability
Developing submarginal land is particularly capital-intensive, and the payoff is notably slow. A generic example is reforesting land that is high, cold, dry and sloping, where the timber does not ripen for over a century.
Economies of simultaneity are related to economies of scale. Building higher, taken by itself, suffers diseconomies, also known as increasing costs. On the other hand, building larger, with horizontal expansion, evinces economies of scale. It also requires more land, meaning more land rent. It comes into style during periods of rent-leading capital building.
45. There are "economies of simultaneity" in building, so if you are going to build to four stories, you have to do it all at once. Suppose today's demand is high enough to justify a two-story building, but you see the demand rising steadily over the 40-year life of the building. You build a four-story building today, and absorb some early losses on the upper two stories, as an investment for future years.
However, in the frenzy of a speculative boom the market sends the wrong signals. Land is peculiarly subject to irrational speculative pricing in booms because of its subjective pricing - see B-16.
Overpricing of land reserves land for two contrasting kinds of buyers and holders.
Type A buyers would "force the future" with "rent-leading" buildings. They plan to and do develop land for a future demand higher than present demand. In Chicago, 1835, this was exemplified by building four-story buildings outside The Loop (the city center). Overpricing and consequent over-improvement gets greater, the further out you go.
When that demand fails to materialize, Type A buyers cannot recover their money. They cannot rent out all their floor space, if that is what they built. Or they cannot use the full capacity of their tannery, harbor, shipyard, sawmill, packing plant, soap factory, brickyard, or whatever they overbuilt.
When Type A buyers develop land beyond the reach of existing infrastructure, they force extensions of same which are often losers, cross-subsidized by the whole system.
Type B landowners just hold land unused or underused. Rather than force the future, they would free-ride on the future. They are usually looking or expecting to sell for a rise. Type B-1 is the aggressive outside buyer, the stereotypical "land speculator" who does this calculatingly, cold-heartedly, as a purely pecuniary investment. Type B-2 is the ancient owner whose land just happens to lie in the way of growth. Type B-2 owners are sympathetic figures in popular drama and sentiment. They are passive victims of change, clinging to old values against mechanistic, impersonal, exogenous, amoral, modernizing forces. However, their market behavior has much the same economic consequences as that of Type B-1. Many turn out to be ambivalent, resisting change for a few years while quietly expecting to sell out for the top dollar for their retirement.
The land of Type B landowners absorbs no capital directly, but much capital indirectly, by forcing the stretching-out of all land-linking investments in space, and generating no traffic or use to justify those that are built to and past them. Empty land also generates no synergistic spillover gains to raise the cash flow of surrounding, complementary lands. Thus it helps freeze capital sunk in improving them.
Following an argument developed by Smith, Ricardo, Mill, Wicksell, Spietboff, Hayek, and others, an excess commitment of capital to fixed forms with slow recovery rates brings on a shortage of job-making investing. See the summary in Haberler, Prosperity and Depression.
SUMMARYIn summary, we have reviewed ten primary reasons why economic theory should treat land as a distinctive factor of production; and nineteen practical inferences therefrom. Making land markets, land policy, and land taxation work well for the general welfare is a major challenge for economists and statesmen. They have neglected it for too long by swallowing the peculiar neoclassical sophisms that would obscure or deny all distinctions between land and capital.
BibliographyAaron, Henry, and Harvey Galper, Assessing Tax Reform. Washington: The Brookings Institution, 1985, p.76
Boehm-Bawerk, Eugen, 1907. Quarterly Journal of Economics, vol. xxi/2, February, pp. 282-.
Bogart, William T., David Bradford, and Michael Williams, 1992. "Incidence and Allocation Effects of a State Fiscal Policy Shift: the Florio Initiative in New Jersey." Cambridge, MA: National Bureau of Economic Research, Working Paper No. 4177, October. Rpt. National Tax Journal, December, 1992.
California Commission on Immigration and Housing. 1919. Large Landholdings in Southern California (A Report on), with Recommendations. Sacramento: California State Printing Office.
Carver, Thomas N., 1915. Essays in Social Justice. Cambridge: Harvard University Press
Clark, J.B., 1893. "The Genesis of Capital." Yale Review, Nov., pp. 302-15.
Clark, J.B., 1907. "Concerning the nature of capital: a reply to Dr. Eugen von Boehm-Bawerk." Quarterly Journal of Economics, v.21, pp. 351-70, May. Transl. to German by dr. Josef Schumpeter. Zeitschrift fur Volkerwirtschaft, v. 16, pp. 426-40, 1907.
Douglas, Roy, 1976. Land, People & Politics: the Land Question in the U.K., 1878-1952. London: Allison and Busby.
Feder, Kris, 1993. "Land Speculation and Land Value Taxation." Dissertation, Temple University.
Fellmeth, Robert (ed.), 1971. Power and Land in California. In two volumes. Washington: Center for Study of Responsive Law
Fellmeth, Robert, 1973. Politics of Land. NY: Grossman Publishers, pp. 3-25, 163-80
Gaffney, Mason, 1961. "The Unwieldy Time-dimension of Space." AJES 20(5):465-81. October.
Gaffney, Mason, 1962. "Land and Rent in Welfare Economics." In Marion Clawson, Marshall Harriss and Joseph Ackerman (eds.) Land Economics Research. Baltimore: The Johns Hopkins University Press. Pp. 141-67.
Gaffney, Mason, 1965. "Soil Depletion and Land Rent." Natural Resources Journal 4(3):537-57
Gaffney, Mason, 1967. Extractive Resources and Taxation. Madison: University of Wisconsin Press
Gaffney, Mason, 1970. "Adequacy of Land as a Tax Base." In Daniel Holland (ed.), The Assessment of Land Value. Madison: Univ. of Wisconsin Press, pp. 157-212.
Gaffney, Mason, 1971. "The Property Tax is a Progressive Tax"; Proceedings, NTA, 64th Annual Conference, Kansas City, 1971, pp. 408-26.
Gaffney, Mason, 1992. "The Taxable Surplus in Water Resources." Contemporary Policy Issues.
Gaffney, Mason, 1992. "Rising Inequality and Falling Property Tax Rates." Chapter 10 in Gene Wunderlich (ed.), Ownership, Tenure, and Taxation of Agricultural Land. Boulder: Westview Press.
Gaffney, Mason, 1993. "The Taxable Capacity of Land." Proceedings, Conference on Land Value Taxation for New York State, January, 1993. Albany, New York: The Government Law Center, Albany Law School
Gaffney, Mason, 1993. "Whose Water? Ours." In Polly Dyer (ed.), Whose Water? Seattle: The University of Washington.
Gaffney, Mason, 1993. "Who Owns Southern California?" Notes on concentration of landholdings, 1988 (revised, March 1990; May 10, 1991; 24 Oct 93)
Gates, Paul, 1978. "California Land Policy and its Historical Context: the Henry George Era." Institute of Governmental Studies, Four Persistent Issues. Berkeley: University of California, pp. 1-30.
George, Henry, 1871. Our Land and Land Policy. Rpt. New York: Schalkenbach Foundation
Goodall, Merrill, 1991. "Property and Water Institutions in California." Draft, pp. 1-18, available from author, Claremont Graduate School, Claremont, California
Gottlieb, Robert, and Irene Wolt, 1977. Thinking Big. New York: Putnam, pp. 500-09
Gottlieb, Robert, and Peter Wiley, 1982. Empires in the Sun. New York: Putnam
Gottlieb, Robert, 1988. A Life of its Own. NY: Harcourt Brace Jovanovich, Publishers
Greider, William, 1992. Who Will Tell the People? New York: Simon and Schuster
Haberler, Gottfried, 1937. Prosperity and Depression. Geneva: The League of Nations, pp. 70-75 (summary of Spiethoff, q.v.)
Hayek, Friedrich A. v., 1935-36. "The Mythology of Capital." Rpt. in Fellner, William, and Bernard Haley (eds.), 1951, Readings in the Theory of Income Distribution. Selected by a Committee of the American Economic Association. Philadelphia: The Blakiston Co., pp. 355-83.
Henry, John, 1994. Book-length manuscript on J.B. Clark.
Hurd, Richard, 1902. Principles of City Land Values. New York: Record and Guide
Knight, Frank H., 1946. "Capital and Interest." Encyclopedia Brittanica, Rpt. in Fellner, William, and Bernard Haley (eds.), 1951, Readings in the Theory of Income Distribution. Selected by a Committee of the American Economic Association. Philadelphia: The Blakiston Co., pp. 384-417.
Knight, Frank H. 1924, rpt. 1952. "Some Fallacies in the Interpretation of Social Cost." In Stigler, George, and Kenneth Boulding (eds.), Readings in Price Theory, Selected by a Committee of the American Economic Association. Chicago: R.D. Irwin.
Knight, Frank H. 1931-36, six articles cited in Hayek, q.v., p.355.
Marshall, Alfred, 1920, rpt. 1947. Principles of Economics. 8th ed. London: Macmillan
McWilliams, Carey, 1939. "Land Monopolization." Chap. 2, Factories in the Field, Boston: Little, Brown and Co., pp. 11-27.
Mill, J.S., 1848. Principles of Political Economy. Book IV, chap. III, "Influence of the Progress of Industry and Population on Rents, Profits, and Wages," Article 4.
Mints, Lloyd, 1945. A History of Banking Theory. Chicago: Univ. of Chicago Press.
Montgomery, Robert H., 1940. The Brimstone Game. New York: The Vanguard Press
Myers, W.I., 1920. An Economic Study of Farm Layout. Ithaca: Cornell University Press.
Roberts, Polly, 1971. "Power and Land in California." A summary of the Nader Report chaired by Robert Fellmeth, 1971
Roberts, Warren, 1967. "Mine Taxation in Developing Countries." In Gaffney, Mason (ed.), Extractive Resources and Taxation. Madison: University of Wisconsin Press
Rosenbaum, David E., 1994. "IRS Eludes Parking Tax Law." New York Times News Service. Riverside, California: The Press-Enterprise, 24 February, p.A-12
Schikele, Rainer, 1942, "Obstacles to Agricultural Production Expansion," Journal of Farm Economics 24:447-62.
Shannon, H.L., and H.M. Bodfish, 1929. "Increments in Land Values in Chicago." Journal of Land and Public Utility Economics 5:29-47.
Sinclair, Upton, 1923. The Goose Step, A Study of American Education. Pasadena: Published by the author. Wholesale Distributors, The Economy Book Shop, 33 South Clark St., Chicago.
Spahr, Charles B., 1891. "The Single Tax." Political Science Quarterly 6:625-34
Spiethoff, Arthur, 1925. "Krisen." Handworterbuch des Staatswissenschaften, 4th ed., Jena, vol. VI, 70-86.
The Press-Enterprise, Riverside, 1993. "Vons buys Builders' Emporium Stores," 15 October, p. C-7.
Tideman, T. Nicolaus, 1982. "A Tax on Land Value is Neutral." National Tax Journal 35:109-11.
Triffin, Robert, 1940. Monopolistic Competition and General Equilibrium Theory. Cambridge, Massachusetts: Harvard University Press
U.S. Census of Agriculture, 1987, pp.16, 36, 84, 120
U.S. Department of the Interior, Bureau of Reclamation, 1946. Landownership Survey on Federal Reclamation Projects. Washington: U.S.G.P.O.
Veblen, Thorstein, 1923. Absentee Ownership. New York: B.W. Huebsch.
Villarejo, Don, 1986. How Much is Enough? Federal Water Subsidies and Agriculture in California's Central Valley. Davis: California Institute for Rural Studies, Inc.
Wicksell, Knut, 1938. Lectures on Political Economy, trans. E. Classen. New York: The Macmillan Co.
Wicksell, Knut, 1954. Value, Capital, and Rent, trans. S.H. Frowein. London: G. Allen & Irwin
Wieser, Friedrich von, 1888, trans. 1893. Natural Value. C.A. Malloch (trans.) London: Macmillan and Co. DELETE FROM NOTE 5, IF POSSIBLE; OTHERWISE IGNORE
Wilson, Edwin, and Marion Clawson, 1945. Agricultural Land Ownership and Operation in the Southern San Joaquin Valley. Berkeley: USDA, Bureau of Agricultural Economics
Worster, Donald, 1985. Rivers of Empire. New York: Pantheon Books, pp. 98-111, 243-47, 291-302
to email this page to a friend: right click, choose "send"
Wealth and Want
... because democracy alone hasn't yet led to a society in which all can prosper