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Land Acquiring Value

Louis Post: Outlines of Louis F. Post's Lectures, with Illustrative Notes and Charts (1894)

a. Explanation of Wages and Rent

Differences in the desirableness of land divide Wealth into the two funds, Wages and Rent. Labor naturally applies its forces to that land from which, considering all the existing and known circumstances, most Wealth can be produced with least expenditure of labor force. Such land is the best. So long as the best land exceeds demand for it, laborers are upon an equality of opportunity, and the entire product goes to them as Wages in proportion to the labor force they respectively expend. But when the supply of the best land falls below demand for it, some laborers must resort to land where with an equal expenditure of labor force they produce less wealth than those who use the best land. The laborers thus excluded from the best land naturally offer a premium for it, or what is the same thing, offer to work for its owners for what they might obtain by working for themselves upon the poorer land. This condition differentiates Rent from Wages. Rent goes to land-owners as such, irrespective of whether they labor or not; Wages go to laborers as such, irrespective of whether they own land or not.85

85. Land of every kind may vary in desirableness from other land of the same kind. Certain farming land, for example, is so fertile that it will yield to a given application of labor two bushels of wheat to every bushel that certain other farming land will yield; and it is obvious that, other things being equal, farmers would prefer the more fertile land. But some fertile land lies so far away from market that less fertile land lying nearer is more productive, because it costs less to exchange its products for what their producer demands; in such cases farmers would prefer the less fertile land. The same principle applies to all kinds of land. Building lots at or near a center of residence or business are preferable for most purposes of residence or business to lots equally good in other respects which are far away.

Now, the land that is preferable is of course most in demand; and if it be all in use, with demand for it unsatisfied, competition for the preference sets in, and gives value to it.

All land cannot be equally desirable. Some excels in fertility. Some is rich with mineral deposits, a species of fertility. On some, towns and cities settle, thereby adding to the productiveness of the labor that uses it, because these sites are thus made centers of co-operation or trade. And yet production in the civilized state requires that the producer shall have exclusive possession of the land lie needs. This necessity inevitably gives to some people more desirable land than others have, even though all should have an abundance. Consequently the returns to equal labor are unequal. The man who has land that is more fertile or better located than that of another gets more wealth than the other in return for a given expenditure of labor. If, for example, one with given labor produces 10 bushels of corn from fertile land, equal, say, to $5 worth of any kind of wealth in the market, and the other with the same labor produces 8 bushels of corn, or $4 worth of any kind of wealth in the market, the first receives 2 bushels (or $1) more for his labor than the other receives for his, though each labors with equal effort, skill, and intelligence. Or, if the fertility of the land be the same, but its situation in reference to the market be such that the cost of transportation still preserves the relation of $5 to $4, the same inequality of wages results. It is this phenomenon that gives rise to Rent. Rent is the market value of just such differences in opportunity as are here illustrated. It is a premium for choice land, for preferential locations, for site, for space.

This premium is a very different thing from compensation for labor. Nor is the difference modified when premium owners first obtain Wages for work and with them buy the premium-commanding land. Rent can no more be turned into compensation for labor by exchanging labor products for the power to exact it, than a man can be turned into Wealth by exchanging Wealth for him. Whether the fruits of purchase or of conquest, or of fraud, Rent always constitutes that part of Wealth which is deducted from current production as premiums for superior opportunities for production.

Wages and Rent are both drawn from Wealth, and both go often to the same individual and in the same form of payment, as when a freehold farmer enjoys the use of the grain he raises from more fertile land than his neighbors have, or a city freeholder occupies or receives hire from his house and lot: but Wages flow from Wealth to labor as compensation for production, while Rent flows from Wealth to land-owners in premiums for allowing labor to produce Wealth from superior locations. Wages are appurtenant to Labor; Rent is appurtenant to Land. It is as laborer that the individual takes Wages, but as land-owner that he takes Rent.

To illustrate: On the following page are four closed spaces representing land which varies in productiveness to a given expenditure of labor force, 86 from 4 down to 1. There is also an open space at the right, representing land that is yet so poor as to yield nothing to the given expenditure of labor force. Thus: [chart]

86. A unit of labor cannot be definitely measured save by the value of some labor product. The day's labor of one man may produce less than an hour's labor of another. But for purposes of illustration it is competent to refer to a unit of labor force as an abstraction, intending thereby to denote all the labor of muscle and brain requisite to acquire the necessary knowledge and skill and to produce wealth to a given value from given natural sources.

For simplicity let the market be equally convenient to each space. Let it be assumed also that one space is as accessible to labor as another, and that the differences in their productiveness are known. Now, to which space would labor first resort? Obviously to that which would yield most Wealth to the given expenditure of labor force — the space to the extreme left.

Suppose, then, that labor appropriates only as much of the best space as is required for use — say half of it. We may note the fact with red color upon the chart:

Here we see that Wages are 4 and Rent 0. The laborers, as such, take the entire product, dividing it among themselves in proportion to their services. There is no Rent because other laborers find equally good opportunities to produce in the uncolored part of the space; the supply of the best land exceeds the demand for it, and of course it commands no premium.87

87. "No land ever pays rent unless in point of fertility or situation it belongs to those superior kinds which exist in less quantity than the demand." — Mill's Prin., book ii, ch. xvi, sec. 2.

"The produce of labor constitutes the natural recompense or wages of labor. In that original state of things, which precedes both the appropriation of land and the accumulation of stock, the whole produce of labor belongs to the laborer." — Smith's Wealth of Nations, book i, ch. viii.

"Rent or land value does not arise from the productiveness or utility of land. It in no wise represents any help or advantage given to production, but simply the power of securing a part of the results of production. No matter what are its capabilities, land can yield no rent and have no value until some one is willing to give labor or the results of labor for the privilege of using it; and what any one will thus give, depends not upon the capacity of the land, but upon its capacity as compared with that of land that can be had for nothing. I may have very rich land, but it will yield no rent and have no value so long as there is other land as good to be had without cost. But when this other land is appropriated, and the best land to be had for nothing is inferior, either in fertility, situation, or other quality, my land will begin to have a value and yield rent. And though the productiveness of my land may decrease, yet if the productiveness of the land to be had without charge decreases in greater proportion, the rent I can get, and consequently the value of my land, will steadily increase. Rent, in short, is the price of monopoly, arising from the reduction to individual ownership of natural elements which human exertion can neither produce nor increase." — Progress and Poverty, book iii, ch. ii.

But if demand for land should continue until the best space was monopolized, 88 and some laborers were forced to resort to the next, the best space would command a premium; 89 Rent would rise and Wages would fall. Even though but few laborers were forced to the poorer space, they would be perpetual bidders for the advantages of the other space. The effect may be illustrated by indicating with red in our chart the overflow of labor from the first into the second space: [chart]

88. "Rent is the effect of a monopoly; though the monopoly is a natural one, which may be regulated, which may even be held as a trust for the community generally, but which cannot be prevented from existing. . . If all the land of the country belonged to one person he could fix the rent at his pleasure. . . The effect would be much the same if the land belonged to so few people that they could and did act together as one man and the rent by agreement among themselves . . . The only remaining supposition is that of free competition. — Mill's Prin., book ii, ch. xvi, sec. I.

Rent "considered as the price paid for the use of the land is naturally a monopoly price." — Smith's Wealth of Nations, book o, ch. xi.

89. The line of separation between the poorest land thus commanding a premium, and the best land for which labor will not pay a premium, was formerly called "the margin of cultivation," probably because the law of rent was not understood with reference to any but agricultural land; but it is now more generally called "the margin of production," since it is understood that the law of rent applies to all kinds of land, including, of course, the building lots of cities.

The premium for land falls not into the fund termed Wages, but into the fund termed Rent. Henceforth Wages consist not of the entire product of labor, but of so much of that product as might with the same expenditure of labor force be produced from the best land that commands no premium. The remainder goes to the owners of the land from which it is in fact produced, in proportion to the advantages which their land respectively contributes to its production. This excess is the premium. It is what constitutes Rent as distinguished from Wages. And both the amount of the general fund Rent, and the amount of rent which each land-owner obtains, are determined by the competition of labor for superior opportunities.

Thus, in the beginnings all Wealth would be Wages; but as labor was forced from better to poorer lands, or, what is the same thing in its principle of operation, as greater capabilities attached to particular lands in consequence of social development, good government, industrial improvement, etc. Rent would arise, and as a proportion of the gross Wealth-product, would increase as labor was forced to poorer land or new capabilities were added to land by society. The law derived from these phenomena is known as Ricardo's law of rent. Henry George formulates it as follows:

"The rent of land is determined by the excess of its produce over that which the same application can secure from the least productive land in use." — Progress and Poverty, book iii, ch. ii.

As will be noticed, the law is the law of Wages as well as the law of Rent. For whatever determines the proportion of Wealth to be taken as Rent necessarily determines the proportion to be left as Wages.

b. Normal Effect of Social Progress upon Wages and Rent

In the foregoing charts the effect of social growth is ignored, it being assumed that the given expenditure of labor force does not become more productive.93 Let us now try to illustrate that effect, upon the supposition that social growth increases the productive power of the given expenditure of labor force as applied to the first closed space, to 100; as applied to the second, to 50; as applied to the third, to 10; as applied to the fourth, to 3, and as applied to the open space, to 1. 94 If there were no increased demand for land the chart would then be like this: [chart]

93. "The effect of increasing population upon the distribution of wealth is to increase rent .. . in two ways: First, By lowering the margin of cultivation. Second, By bringing out in land special capabilities otherwise latent, and by attaching special capabilities to particular lands.

"I am disposed to think that the latter mode, to which little attention has been given by political economists, is really the more important." — Progress and Poverty, book iv, ch. iii.

"When we have inquired what it is that marks off land from those material things which we regard as products of the land, we shall find that the fundamental attribute of land is its extension. The right to use a piece of land gives command over a certain space — a certain part of the earth's surface. The area of the earth is fixed; the geometric relations in which any particular part of it stands to other parts are fixed. Man has no control over them; they are wholly unaffected by demand; they have no cost of production; there is no supply price at which they can be produced.

"The use of a certain area of the earth's surface is a primary condition of anything that man can do; it gives him room for his own actions, with the enjoyment of the heat and the light, the air and the rain which nature assigns to that area; and it determines his distance from, and in great measure his relations to, other things and other persons. We shall find that it is this property of land, which, though as yet insufficient prominence has been given to it, is the ultimate cause of the distinction which all writers are compelled to make between land and other things." — Marshall's Prin., book iv, ch. ii, sec. i.

94. Of course social growth does not go on in this regular way; the charts are merely illustrative. They are intended to illustrate the universal fact that as any land becomes a center of trade or other social relationship its value rises.

Though Rent is now increased, so are Wages. Both benefit by social growth. But if we consider the fact that increase in the productive power of labor increases demand for land we shall see that the tendency of Wages (as a proportion of product if not as an absolute quantity) is downward, while that of Rent is upward. 95 And this conclusion is confirmed by observation. 96

95. "Perhaps it may be well to remind the reader, before closing this chapter, of what has been before stated — that I am using the word wages not in the sense of a quantity, but in the sense of a proportion. When I say that wages fall as rent rises, I do not mean that the quantity of wealth obtained by laborers as wages is necessarily less, but that the proportion which it bears to the whole produce is necessarily less. The proportion may diminish while the quantity remains the same or increases." — Progress and Poverty, book iii, ch. vi.

96. The condition illustrated in the last chart would be the result of social growth if all land but that which was in full use were common land. The discovery of mines, the development of cities and towns, and the construction of railroads, the irrigation of and places, improvements in government, all the infinite conveniences and laborsaving devices that civilization generates, would tend to abolish poverty by increasing the compensation of labor, and making it impossible for any man to be in involuntary idleness, or underpaid, so long as mankind was in want. If demand for land increased, Wages would tend to fall as the demand brought lower grades of land into use; but they would at the same time tend to rise as social growth added new capabilities to the lower grades. And it is altogether probable that, while progress would lower Wages as a proportion of total product, it would increase them as an absolute quantity.

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