TP10. Land – The Forgotten Factor

Does land matter? – Many people in developed countries think that land is no longer important. The control and allocation of land is rarely men­tioned in media discussions of economics. No wonder people receive the impression that land is of little importance in highly developed countries!

Yet people everywhere are as dependent on the natural environment for survival as ever they were. The importance of land to technologically advanced communities is demonstrated by the fact that when inner city land is sold, it fetches a vastly higher price than farmland. Failure to make the relationship of people to land the starting point for the study of modem eco­nomics has led to a proliferation of complicated, contradictory theories and to an imprecise use of terms. Since governments and major industries rely heavily on the advice of economists in making their decisions, the consequences of this confusion affect us all.

The factors of production

The classical economists of the late 18th and 19th centuries, who set out to examine scientifically the principles governing the production of wealth, recognized the importance of using words clearly and precisely. So they began by defining terms:

Wealth meant all material goods created by human beings for their own enjoyment.

They distinguished three factors at work in the production of wealth, and called these factors land, labour and capital.

Land meant all natural resources.

This included the whole of the natural environment: the surface of the earth, whether solid or liquid; what was buried within it; grew out of it naturally; or surrounded it. No wealth could be created without land.

Labour meant all physical and mental effort exerted by human beings in order to obtain wealth.

Some human exertion is required to obtain even the simplest forms of wealth. When I fancy eating blackberries from the hedgerow, I must apply ‘labour’ to ‘land’ before I can do so. Blackberries on the bush are part of ‘land’ in the classical economists’ sense. Finding and picking them is the ‘labour’ I apply to ‘land’; blackberries in my hand are ‘wealth’ ready to be enjoyed. So the two factors which are essential for all wealth production are labour and land.
Capital meant wealth used as an aid to labour in the creating of more, or better, forms of wealth.

A spade is a species of capital: a desirable object manufactured not for its own sake but for the increased facility it gives to the gardener in tilling his plots, much increasing his ability to produce extra wealth in the form of fruit, flowers, or vegetables with the same amount of effort.  ‘Capital’ is not always essential for the produc­tion of wealth, as land and labour are. Human beings can work with hands and brain alone to obtain simple forms of wealth, but even in the most primitive societies, people use capital to help them apply labour to land.

The blurring of distinctions

Unfortunately, the clear and simple distinctions which the classical economists made between the factors of production have been blurred by their modem successors.  The trouble is not just that modem economists use words in different ways from their predecessors a couple of centuries ago ­they often don’t use words in the same way as each other. Some economists, for example, have loos­ened the word ‘capital’ until it has come to cover money, stocks and shares, unfinished goods and, indeed, anything which provides an income. Thus, in the 14th edition of Paul A. Samuelson’s textbook Economics, ‘capital gains’ are defined as: “The rise in value of a capital asset such as land or common stocks, the gain being the difference between the sales price and the purchase price of the asset.” He defines ‘capital markets’ as: “markets in which financial resources (money, bonds, stocks) are traded.”

The word ‘capital’ is used differently by the same author in the two places; while both uses are very different from those of the classical economists.

Some economists have created models of eco­nomic life which recognise only two factors in production – labour and capital. Others have increased the number to four, claiming that a fourth factor, which they call ‘entrepreneurship’ (which, to the classical economist, was merely a species of ‘labour’) is more important than the other three because it is needed to set the others to work. Others have even suggested that there is little value in distinguishing the factors at all. Thus, Frederic Benham (Economics, 16th Edn., 1960) wrote:

“For purposes of planning therefore, or for any practical economic problem, it is of little use to speak of land, labour or capital… .. The line of distinction between land and capital is not clear.”

Land and Capital

The confusion between ‘land’ and ‘capital’ is par­ticularly damaging to clear thought, because the two entities behave in utterly different ways in the process of wealth production:

1. Land is not produced by human beings at all, while capital is produced entirely by human activ­ity (labour) operating on land.

2. The supply of land is fixed; the supply of capi­tal can be increased almost indefinitely to satisfy human requirements. If people want ten million more spades, or ten million more computers, these can be made. If people want one extra acre of land, there is no way in which it can be made.

3. Land is permanent; capital, like other forms of wealth, decays in time. A great building may last for centuries but only with constant maintenance; and eventually it crumbles. Most kinds of capital ­such as factories, machinery, tools etc., last for a much shorter time.

4. Land is always immobile; capital is usually to a greater or lesser extent mobile. The statement that land cannot be moved seems too obvious to be worth making. Yet a popular modem textbook (Richard Lipsey and K. Alec Chrystal: Positive Economics, 8th Edn., 1995) declares that: “Land, although the least mobile factor in a geo­graphical sense, is highly mobile in an economic sense … A factor is said to be mobile if it responds to movements in the prices paid for its services in various uses.”

This betokens confused and misleading, thought. Land cannot respond to changes in prices, but people certainly can. For exam­ple, a builder may offer a farmer on the outskirts of a city a price for his land which the farmer accepts, and the use made of the land will change. But it is the farmer who has responded to the price rise, not the land.

5. Land cannot be stored for future use; capital, and other forms of wealth, usually can be stored. Some modem economists, it is true, have sug­gested that land can also be stored for future use. Thus in the 1920s, Richard T Ely expounded the doctrine of ‘ripening costs’ which maintained that the owner of land who held it out of use during a period of ‘ripening use’ was doing a service to the community and deserved the higher price which the land would fetch when it had ‘ripened’ and was eventually sold or rented. But land can only produce wealth when labour is applied to it. The wealth which could have been produced during the time when it was kept idle has been lost. And those in need of land for housing, industry or trade have been deprived.

6. The effect of market forces on land is radically different from the effect on other factors of produc­tion. The prices of capital and consumer goods, and the price of labour, tend to rise when there is a shortfall between supply and demand. If people need more computers or more computer operatives than are available, then the price of computers (capital) or the wages of computer operatives (labour), will rise. As a result, people are encouraged to produce more computers or to train as computer opera­tives, thereby reducing the shortage.

But when there is a shortfall between the supply and demand for land, and there is a conse­quential rise in price, only those who already have land can benefit from the price rise. No one can make more land to satisfy rising demand, while owners of land take advantage of the high price. Indeed, when . the demand for land is high, and rising, many people acquire or hold on to land, not in order to use it but in order to keep it idle while they wait for demand, and therefore the price, to rise still higher. In this way, the amount of land available for the production of wealth is actually reduced by high demand.

The consequences

The result of obscuring the difference between land and capital does not stop at intellectual confusion. The consequences of the confusion are mistaken attitudes, which lead to wrong eco­nomic policies and, in the end, a massive amount of unnecessary human misery and suffering. As a result of the confusion several baleful conse­quences follow.

1. The common right to land is ignored.

Land is the common pool of resources from which all human needs are satisfied. No human has ever made it, so common sense demands that we should share it equitably.

2. Wealth is not distributed fairly.

As wealth is the product of human labour, mental and physical, applied to the common resources of  the earth, it is right and natural that wealth should belong to those who create it. Yet in our own society, where people have come to regard land as just one of many human possessions which can be sold or hired for profit, it has come about that the many who are without land depend for the opportunity to work-on the comparatively ­few who own potentially productive land. In conse­quence, a large share of wealth is taken by those in control of land before work can be done upon it to produce more wealth. The result is intense competition for jobs, low wages, and unemploy­ment.

3. The contribution of land price inflation to recurring industrial depressions is seldom recognized.

Because land is different from all other human assets in being a fixed quantity, market forces do not act on it in the same way as on labour and capital. In times of boom, land prices soar unchecked. Land takes too large a share of the total wealth produced and not enough is left to the providers of labour and capital to keep the processes of manufacture and exchange going.

When industry starts to expand, the demand for land grows with it and the price begins to rise, both buyers and sellers anticipate that the limited supply of land will be even more valuable in the future, and so the price is raised every time it is sold.

Speculators simply hold on to land, keeping it unused or underused, waiting for the price to rise. Others acquire land, not for use but to sell at a higher price later. Builders, who anticipate that the land they will need in the future will cost them even more, set up ‘land banks’ to protect them­selves from future increases in land prices. All this reduces the amount of land available for use, and pushes rents and selling prices still higher.

In time, some people or firms pay a speculative price for land which is so high that current produc­tion becomes unprofitable and they fail. Other firms close down when their leases fall in and they cannot renew them at the new rates which are demanded. This has a knock-on effect. Workers lose their jobs. The consequent reduction in their purchasing power means that other firms lose sales. They too have to close down, and there is further unemployment. The downward spiral accelerates. Eventually, reduced industrial and commercial activity reduces the demand for land, and therefore the price. This continues until the price of land is low enough for businesses to pay the rent or selling price for land and make a profit again. The cycle is then set to repeat itself.

4. The share of wealth claimed through control of land grows at the expense of wages as a community develops and material progress is made.

It takes the co-operative effort of a community ­sharing knowledge, developing specialised skills, exchanging goods and services – to create great wealth.

Within such a community, where people need to live and work in close contact, the advantages of certain locations over others in obtaining a share of the available wealth are intensified. To give a simple example: a newsagent in a station foyer will do a brisker trade in newspapers than one in a side street where few people pass.

Not only are some people able to make a greater profit without extra effort through occupying the best sites, but others are able to claim a large share of the community’s wealth without working at all by charging high rents for the most advantageous sites. Any development which increases the community’s capacity to produce wealth (e.g., a new transport facility) also increases the attractiveness of certain areas of land and allows landowners to increase rents and selling prices. And so, with every increase in wealth there is an increase in the proportion of unearned wealth taken by those in charge of land.

Towards a solution

In our technological society, it is neither desir­able nor possible to share out the land equally. But we can make an arrangement which allows all of us to benefit equally from the land.

Suppose that everybody paid rent in proportion to the quantity and quality of land he held into a common fund which was used for public services. This would bring idle land into use and also enable us greatly to reduce existing taxes like income tax and VAT. It would also be much more just. If we paid a land value tax, we would be paying to the community for what we have taken from common resources, rather than surrendering part of the earnings which we have made by our own efforts. Taxation based on land values has already been introduced to a limited extent in many places.

Ignoring the real nature of land and treating it as the private property of individuals has caused the human race much trouble and misery.  Recog­nising this mistake gives us the opportunity to base our economy on a system of natural justice which will lead to a fairer, more prosperous and happier society.

Further reading

False Education in our Colleges and Universitiesby Emil O Jorgensen 1925The Corruption of Economics by Gaffney, Harrison, Mason, Feder, pub Shepheard-Walwyn 1994