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Capital Formation

When people have to pay off others for access to land, it is difficult to accumulate money to invest in manmade things. If we can lower the price of land, far more money will be available for wages and for investment in plants and equipment.

Mason Gaffney: Land as a Distinctive Factor of Production

Investors respond to high land-price by forming land-saving capital, i.e. substituting capital for land.  It is useful to distinguish five forms this substitution takes (cf A-6, where these points are outlined).
i)      Land-saving capital, like high buildings.  Land-saving comprises intensification of use of previously rentable lands, or "exploiting the intensive margin of production".
ii)     Land-enhancing capital, meaning capital used to improve land for a new, higher use.  This includes bringing marginal land into production, on remote frontiers.  However, that is only a small part of what it means.  Both country and city are marked by many edges or "ecotones"44 where lower uses give way to higher uses. Each is an economic frontier.  Thus, land enhancing also means converting rangeland to plowland, dryland to irrigated land, irrigated pasture to horticulture, and furrow irrigation to drip irrigation.  In urban growth, it means converting farmland or wasteland to dwelling units, low-density estates to subdivisions, single-family detached units to garden apartments, garden apartments to high-rise apartments, residential to commercial, and obsolete structures to modern ones.
44.     "Interfaces of supersession" is a polysyllabic equivalent used by land economists.

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.
iii)    Land-linking capital, like canals and rails and city streets.

iv)     Land-capturing (rent-seeking) capital, like squatters' improvements, and canal and rail lines built to secure land grants, and dams and canals built to secure water rights.  These land-seizing investments are never optimal for society, and they always waste capital.  Land-seizing investments are laid out by self-seeking individuals ("rational economic agents") with no expectation of ever recovering the capital invested because the payoff comes as title to land, which never wears out.  Canal, rail, traction, water supply, freeway and other such promoters are always mainly in the business of selling lands.
v)      Rent-leading capital.  In urban growth, an example is over-improving land today, expecting higher demand tomorrow.45  This is "forcing the future".  It occurs because there are "economies of simultaneity" in building.  It is hardly ever economical to add stories to buildings one at a time.  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 60-year life of the building.  You build a four-story building today, and absorb early losses on the upper two stories, as an investment for future years.  A city builds a four-lane street, where two would do today, anticipating higher future usage.  It puts excess capacity in its water and sewer lines, for future growth.  Such examples are legion.
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.  Read the whole article

Mason Gaffney:  Full Employment, Growth And Progress On A Small Planet: Relieving Poverty While Healing The Earth

Net domestic capital formation. We need to get away from the disregard many radical reformers show for the incentives for capital formation, conservation, and maintenance. George was less insouciant than Marx or Keynes, and he did see the merit of untaxing capital, but he had no concern about the aggregate supply: by inference, importing capital was as good as forming it locally, or domestically.

Incentives are needed, not just to import capital, but to form capital. Besides simply forming newcapital, we need incentives NOT to squander existing capital, in the manner of the notorious Prince of Brunei who indulges himself with his traveling harem, retinue, yachts and racehorses; or worse, in the manner of Osama bin Laden who indulges his passions with the jihad that not only consumes his own capital, but destroys that of his enemies. Marxists and early Keynesians seem to see the rich as automatically creating more capital than can be used. They underrate the capacity of the rich for self-indulgence, and the tendency of social standards of consumption to rise with wealth.

Marxists and Keynesians also overrate the automaticity of domestic American capital formation. They, and many others, still see the U.S.A. as the overflowing fount of loans for the world. Yet, the U.S.A. is now the world’s leading debtor nation. Those who see the forgiveness of international debts as a means of transferring wealth FROM the U.S.A. should give that fact some prayerful thought.

Modern conservative champions of incentives for capital formation err also in failing to note that it is important to use any given aggregate of capital efficiently – as important as to create more capital. When we speak of “any given aggregate of capital” we are constructing a temporary mental model in which capital is like land, i.e. fixed in supply. Here, the function of price and the market is to get that fixed supply allocated optimally, i.e. put to the best use. “Price,” in this case, means the rate of interest.

They err even more egregiously, and tendentiously, in making their favorite cause the exemption of “capital gains” from taxation. I put “capital gains” in quotes because most capital gains are land value gains (Gaffney, 1990). “Capital gains” is one of those slippery euphemisms that P.R. people came up with, and the media circulate, to camouflage unearned increments as functional incentives and rewards for creating capital, and investing it in income-creating ways. It’s a way of controlling us by corrupting the language. A tragedy of modern Georgism is how easily its Philadelphia convention, during the first Bush Administration, was stampeded into memorializing Congress to repeal the capital gains tax. A convention of land speculators could have done no worse. Most modern Georgists simply did not understand, or seem to care to understand, how the income tax works. There has been some progress since then; but still, they need to wake up and smell the coffee. Read the whole article

Michael Hudson and Kris Feder: Real Estate and the Capital Gains Debate

Because real estate investors make much of their money by buying and reselling existing properties, much as financial investors buy already seasoned stocks and bonds, many real estate and stock transactions have no new employment or direct investment effects regardless of the capital gains incentives being offered. Yet the tax code permits real estate investors to take their returns mainly in the form of capital gains and declare little taxable ordinary income. FIRE sector investors in the finance and insurance industries also have taken their income in ever more lightly taxed forms. These tax subsidies divert effort and ingenuity out of productive channels and into speculation on already existing buildings and land, or already issued stocks and bonds. An across-the-board cut in capital gains taxes would favor the FIRE sector rather than manufacturing, steering investment money further from active to passive investment. Far greater stimulus to productivity is to be expected from, instead, eliminating special privileges and closing loopholes -- while reducing taxes on payrolls, sales, and enterprise. ...

If the intention is to provide an incentive for new direct investment, employment, and industrial modernization, then an across-the-board capital gains tax cut is at best a blunt policy instrument. We have examined several reasons to doubt that further cuts in capital gains taxes will have a pronounced incentive effect on new direct investment.49 Capital gains tend to reward accumulation of old assets more than production of new wealth.   Read the whole article

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Wealth and Want
... because democracy alone hasn't yet led to a society in which all can prosper