James James has some questions.
1. Re the idea that gains tend to accrue to the least elastic factor of production (e.g. increased top football profits mostly go to the top footballers): Is there a way to quantify elasticity, other than just the gradient of a demand or supply curve at the intersection? What are the units?
There is a way of quantifying the price elasticity of demand for something, it's the change in quantity demanded divided by the change in price, see Wiki. And the price elasticity of supply is change in supply divided by change in price, see Wiki. The actual elasticity of something can only really be derived from observation; logic only helps you if the quantity is totally fixed in which case supply (e.g. of land, of footballers) is totally inelastic, i.e. elasticity is zero.
Remember: when we are looking at tax incidence, the point is that tax is borne by the least elastic factor.
2. You've said that since land is the least elastic factor of production, gains from economic growth will mostly be captured by landowers. This sounds true, and seems to imply that it is very sensible to buy land because it will go up in value relative to everything else. However, surely if the return on land was higher than the return on capital, more people would buy land, pushing the price up and reducing the return? So there would be no advantage to purchasing land over capital: investing in land and investing in the stock market would both have the same average long-run return. Have I gone wrong? If so, where?
The long run trend value is clearly upwards; inflation proofed; the value of a location does not erode - and people anticipate this.
So people borrow money to buy it, so the price of land (the net present value of all the future rents) is sensitive to interest rates. So when interest rates fall, first of all there is a one-off jump in the selling price of land. Now, because people believe that
i. land values are 'capital';
ii. the interest-rate fuelled jump is an increase in its real value;
iii. these increases are going to continue; and
iv. They can make money for nothing if the expected increases are lower than annual interest rates (so you can borrow money at 5% interest to buy something going up in value by 10%)
we get regularly recurring land price bubbles, like clockwork every 18 years.
Sooner or later the bubbles pop, there is a 'financial crisis', a recession, people run out of money to pay the interest as the real return on land is far lower than actual interest rates and the whole thing goes horribly wrong. And just because land rents as a whole nationally go up does not mean that land rents at all locations will go up.
3. You don't consider land to be capital. Why not? What is your definition of capital? How/why does it exclude land? It seems to me that even if land is not capital, it shares all capital's characteristics. If it looks like a duck...
The greatest trick the land owning classes every pulled was to convince people that 'land' was 'capital'. The Faux Libertarians especially keep coming back to it. To put it bluntly, the real value of land is purely down to its location and what 'everybody else' does in the vicinity.
And the most important single thing is that the land is within the borders of a reasonably stable nation-state. Imagine that UN and AU peacekeepers manage to drive the Islamists out of Mogadishu and restore law and order. Does the value of all the physical objects in the city double overnight? Nope. Do the innate skills and abilities of its inhabitants double overnight? Nope. Do land rents go up? Yup.
Thus land 'ownership' and 'the nation-state' are synonymous, they are two sides of the same coin, you cannot have one without the other. Which makes is particularly galling when people say that land ownership came first and only then did the nation-state and all its inhabitants come along trying to get their grubby mitts on it. It is equally the case that people organise themselves into nation-states and then the land owners get their grubby mitts on the rents.
Even if you argue that people shouldn't be able to own land, a state certainly has incentive to invest in their land, to boost location value. Therefore, it seems reasonable to me for a state to refer to its territory as its capital.
I never said people shouldn't be able to own land. I am very much in favour of people owning land. What I said was that the economy works best when land owners have to pay for the location rent. That's the same as saying "Every individual owns his own body but that does not entitle him to free food for life". Owning land (and the buildings on it) but paying rent for the location is no different to owning a car but having to pay for petrol. The physical land and the location rent are as different as your body and the food you eat; they are as different as the car you own and the petrol you buy as you go along.
And seeing as it was the nation-state which enabled that rent to arise; and seeing as the nation-state is just lots of people abiding by common rules and chipping in for defence against external and internal enemies, we might as well dish the total revenues collected out as a Citizen's Dividend (better than chucking the proceeds in the North Sea).
4. If the supply of land/locations is perfectly inelastic, why doesn't *all* economic growth get captured by landowners?
Supply is inelastic, but demand for land is price elastic, if it gets too expensive, people use less. Land is a monopoly or a cartel, but just because something is a monopoly doesn't mean that the monopolist can charge as much as he wants, there will always be a profit maximising price, which is not infinity.
So if rents are very high, people will club together and share a house or a flat even if they don't like each other. Further, land only soaks up the surplus above the "basic minimum" and the "basic minimum" is whatever the bulk of people decide it is at any particular time; what we now consider a "basic minimum" is rolling in luxury compared to sixty years ago. And what we now consider a "basic minimum" might be considered as bare subsistence level by people in another sixty years' time.
So if we compare now with [some stage in the past], the "increasing basic minimum" effect largely cancels out the "rents grow as share of growing GDP" effect*. But if we compare now (high income areas) with now (low income areas) we see that because the "basic minimum" is much the same everywhere, just about all the higher incomes are soaked up by higher rents.
* Over the last sixty years, GDP has grown (say) ten-fold in real terms, but rents are a lot less than nine-tenths of GDP.
Completely predictable
31 minutes ago
42 comments:
Excellent summary, MW. On the topic of "land is not capital", I'd like to add that no economist considered land to be capital until one of the early neoclassical economists, J B Clark, wrote a paper claiming that it was in the late 19th century. Other neoclassical economists followed his lead until today it is difficult to get most economists to believe otherwise.
Hence one reason that modern economics is so poor at forecasting economic crises.
"...The greatest trick the land owning classes every pulled was to convince people that 'land' was 'capital'..." How very bloody true. In my initial presentation to prospective clients the explanation of the three factors of production is often controversial. Telling them that capital is not land takes most of them by surprise.
Oh well. Onward and upwards.
A successful parasite may weaken it's host but doesn't kill it. Some, by infecting the brain and changing thought processes, subvert it's hosts behaviour in order be more successful.
http://en.wikipedia.org/wiki/Toxoplasmosis
Reminds one of landowners.
D, yes I believe that it was only fairly recently, late 19th/early 20th century that this myth was first launched.
But it's not like the early proper capitalists (i.e. factory owners) covered themselves in glory, because having been driven off the land by the enclosures, the workers could be treated like shit. The problem was, you didn't see many poor people in the countryside, you only saw them in towns, so people made the incorrect assumption that the root cause of poverty/inequality was the factory owners.
L, twenty years ago, there was an article in the FT which said that the notion of three factors is nonsense, actually there arejust labour and land. Capital is just accumulated labour.
BS, but changing our behaviour is not good enough for the Homeys, they always end up nearly killing the host.
Businessweek outdoes the Daily Wail!
http://www.businessweek.com/articles/2012-03-15/acapulco-another-mexican-drug-war-casualty?r=related-rail-img
Toxohomeyosis perhaps? Main vectors? The Daily Telegraph and cheap daytime programmes on property. This current list goes to show just how firmly this parasite has taken hold.
http://propertyauctionaction.co.uk/html/television-property-programme-guide.html
Note, the above list contains no reference to Sarah Beeny, who has been responsible for some of the most virulent programmes known in the UK.
SB, nice one. But it illustrates the point yet again.
BS, our current most hated property porn star is that bloke George Clarke from Channel 4, who has actually persuaded the government to give yet more money to land owners.
and if Acapulco police remove the gangs, the company will benefit, not the police.
"To put it bluntly, the real value of land is purely down to its location and what 'everybody else' does in the vicinity."
Not in the UK it isn't. In the UK the greatest proportion (90%+) of the value of a piece of land is the planning status of that land. You can buy an one acre field of agricultural land on the edge of a nice country village for £25k. An identical field with planning permission for 4 houses is worth £400k at the very least. Land with permission for industrial development is worth £200k/acre, with permission for a supermarket £1m/acre.
If land values are purely down to location, how can you account for all those differing values for land in exactly the same spot?
Sobers, the fact that a plot with planning permission is worth ten times as much as one without doesn't mean that "90%+... of the value of a piece of land is the planning status of that land". If that were true, then all land with planning permission would have essentially the same price.
Also Mark, one thing I think you left out of your answer to point number 2 in the main blog was that yes, competition between land-use deciders drives the yield of land down to the average rate of return, but this just means the price landowners get increases. It's the price that matters, not the yield. Would you rather have an asset worth £1million yielding 1% or an asset worth £100 yielding 100%? Exactly.
Hold the presses! Here's a sighting of a real live Poor Widow in a "mansion" in Canada. This is actually a very good story as it demonstrates what a real Poor Widow has done when faced with a house worth 40 times what she originally paid for it. Check out Garth Turner's blog.
S, and who grants planning permission? "Everybody else", that's who, which proves my point. It is "everybody else" who decides or influences the value of land, not the land owner.
RA, good riposte.
D, that woman is a traitor to the Home-Owner-Ist cause.
MW at 22:56 Yes, fair point. Certainly 'capital' can be seen as the accummulated surplus from the application of labour. I s'pose 'leisure' could be viewed in the same way. Does it perhaps stem from the 'labour theory of value'?
L, is leisure time a return to capital? I suppose it might be.
As to the 'labour theory of value' that seems like hokum to me, or else land would be free. As Wiki says:
"The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What every thing is really worth to the man who has acquired it, and who wants to dispose of it or exchange it for something else, is the toil and trouble which it can save to himself, and which it can impose upon other people." (Wealth of Nations Book 1, chapter V)
Smith's theory of price (which for many is the same as value) has nothing to do with the past labor spent in the production of a commodity. It speaks only of the labor that can be "commanded" or "saved" at present. If there is no use for a buggy whip then the item is economically worthless in trade or in use, regardless of all the labor spent in its creation.
"fact that a plot with planning permission is worth ten times as much as one without doesn't mean that "90%+... of the value of a piece of land is the planning status of that land". If that were true, then all land with planning permission would have essentially the same price."
No, I said 90% plus - ie at least 90%. The value of housing land is around 95% planning permission, retail 98% planning permission. Industrial land would be more than 90% despite my figures, as you would need more than an acre to build a factory or industrial park, and the more agricultural land you buy the lower price per acre, no more than £10K max per acre for say 10 acres. Whichever way you look at it land pretty much goes up in value by 10 times once planning has been granted.
LVT is not a tax on location, its a tax on planning status, in the UK anyway, with our large population crammed into a relatively small island, and restrictive planning laws. And its planning that creates high housing prices, nothing to do with rents or anything else. If you abolished all planning rules tomorrow, house prices would drop through the floor.
S, we've done all this before and what you are saying is simply not true.
Yes, overly strict planning laws can distort prices etc, but even in the absence of all planning restrictions, there are high rent and low rent areas. If you buy up a hundred acres of Scottish grousemoor in the middle of nowhere, you can get all the planning permission you like, it would still be worthless.
And as I have explained to you, LVT works perfectly well with or without planning restrictions. There are states in the USA with more or less no planning laws, and there are still expensive areas and cheap areas.
Finally, if we abolished planning laws and people resonded sensibly, then by and large, the total rental value of UK land would go UP (even if house prices went down a bit).
So you have said nothing to disprove the basic facts that land-ownership is only possible within a nation-state; that the two are synonymous; and the value of land is dictated by what "everybody else" does or doesn't do - imposing planning restrictions is something that "everybody else" does, as is lifting them, as is granting them.
Thanks for the detailed answers, once again, Mark.
"Thus land 'ownership' and 'the nation-state' are synonymous, they are two sides of the same coin, you cannot have one without the other."
Well, not quite. Rent waS not zero in Somalia without a government. So while government certainly creates some land value, it doesn't create all the land value. You can still collect rent without the govt.
Also, why doesn't this apply to capital? "Thus 'capital ownership' and 'the nation-state' are synonymous, they are two sides of the same coin, you cannot have one without the other."
Again, I would say, capital ownership is possible without the state, the state just (usually) makes it more secure.
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I'm happy making a distinction between land, labour and capital: it seems pretty fair to me, even if it might be a bit arbitrary. But I can't draw any lessons from it. Land, labour and capital all essentially earn rents, which is why you get the FT trying to define capital as retained labour, or Chinese factories considering labour as a form of capital ("human capital", replaceable, disposable...).
What I am really trying to find out is what moral lessons you think a distinction between land and capital allows you to draw. Why do you think it is so important to make the distinction? Why do you think the homeownerists want to confuse the two? If indeed the homeownerists do try to confuse land and capital, I don't think I've ever been led to a conclusion by this.
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I don't have much time for the moral arguments for LVT: that because location value is created by other people or secured by the state, you *should* pay them tax. I much prefer the wertfrei argument that a sensible state should tax location because it will maximise economic growth and thus long-run income to the state.
JJ: "... why doesn't this apply to capital? "Thus 'capital ownership' and 'the nation-state' are synonymous, they are two sides of the same coin, you cannot have one without the other". Again, I would say, capital ownership is possible without the state, the state just (usually) makes it more secure."
You just answered your own question.
"I'm happy making a distinction between land, labour and capital: it seems pretty fair to me, even if it might be a bit arbitrary. But I can't draw any lessons from it. Land, labour and capital all essentially earn rents..."
Clearly, the distinction is not 100% black vs 100% white, the distinction is between 99% very very very dark grey and 1% very very very pale grey. But the distinction is sharp enough.
Consider, what do you need to make a car or a fridge or a pencil? You need raw materials, designers, skilled labour, unskilled labour, a factory, lots of other customers to get the unit costs down to affordable, you need salesmen, marketing etc. That is a lot of stuff. For sure, you're better off building a factory and selling cars, fridges, pencils in a stable nation-state territory, but that is only a necessary (or at least highly desirable)but not a sufficient condition.
But what do you need to generate land rents? A stable nation-state, that is the only necessary condition and is on its own quite sufficient.
Yes, I prefer wertfrei as well. But facts are facts.
So while government certainly creates some land value, it doesn't create all the land value.
Not government, but community. The behavior of the community is what influences land rents. That in the strictest logical sense does not require government, but I've never seen it done in practice (and indeed I consider it to theoretically impossible).
Rent waS not zero in Somalia without a government.
There were governments, just not one that controlled the entire territory.
I'm happy making a distinction between land, labour and capital: it seems pretty fair to me, even if it might be a bit arbitrary. But I can't draw any lessons from it. Land, labour and capital all essentially earn rents, which is why you get the FT trying to define capital as retained labour, or Chinese factories considering labour as a form of capital ("human capital", replaceable, disposable...).
Be careful with your use of the term 'rent'. Classically it had a different economic meaning from the common usage you just invoked. The common usage is synonymous with 'income'. The classic usage is more specific as 'income from land'.
As for why distinguish? Your own example is instructive. If labour is considered equivalent to capital, then people become ownable, which doesn't square with morality. Speaking of which...
What I am really trying to find out is what moral lessons you think a distinction between land and capital allows you to draw....
I don't have much time for the moral arguments for LVT
a) Make up your mind.
b) If slavery was more efficient, would you support it? This may sound pithy, but it's pretty fundamental.
I much prefer the wertfrei argument that a sensible state should tax location because it will maximise economic growth and thus long-run income to the state.
There is no such thing as wertfrei. It is a contradiction. That maximum economic growth or increased long-run state revenues are desirable are themselves value-judgements.
Fraggle, steady on, JJ said he likes LVT better than other taxes because it just "works", that's good enough for me.
There are some things that would appear to be pretty universally agreed (unemployment is bad, owner-occupation is good, war and crime are bad, government deficits are bad) so it still counts as "wertfrei" to take these as a starting point. I certainly do.
I never said people shouldn't be able to own land. I am very much in favour of people owning land.
With LVT.
JH, yes. Land is in fixed supply but free at point of use. Thus everybody is incentivised to grab as much as possible which is a negative sum game. With LVT, people just use what they need/can afford, so there's more land left over for everybody else.
"If you abolished all planning rules tomorrow, house prices would drop through the floor."
I very much doubt it. All you would get would be a hell of a lot more expensive housing. Yes, the developer's costs would go through the floor, but only the bursting of the housing price bubble would bring selling prices down, and it would do that even if all planning restrictions remained in place. Look what happened in Ireland: prices remained high, despite huge oversupply of new housing, until the money dried up and the bubble burst. Alternatively, look what happened in this country in the '70's - prices rocketed, despite the biggest building boom of the century.
Another point: most buyers in the market for an old house are buying one because they want an house that is old, not just somewhere to live. The supply of old houses is absolutely fixed; you can't build a new old house. Yet despite this, the prices of old houses are, by and large, not much difference to those of similar new houses, which rather suggests that what is controlling that price is not supply and demand.
"If slavery was more efficient, would you support it?"
I think most studies have shown that, economically, slavery is less efficient than employment.
B, I don't know why we bother replying to Sobers actually. James James asked me a few questions which I answered as best I could.
Sobers is coming along putting up his usual objections to LVT which have absolutely nothing to do with the topic in hand
For the purposes of this post, I couldn't actually give a shit whether loosening planning laws would make houses cheaper or more expensive - either way, it illustrates the point that land values are dicated by what "everybody else" does, by what laws the government passes, and so on. If it is true that land values are created by planning and planning alone, then that also illustrates that land values ARE NOT CAPITAL! How can they be?
A government can't create proper "capital" like a car or a fridge or a pencil out of thin air by changing the law, can it? Ergo, if the government can create (or indeed destroy) land values at the drop of a new law, then land values are NOT CAPITAL!!!
So Sobers is not only exaggerating a lot, he is actually providing examples to INDICATE HIS FULL AGREEMENT WITH MY ORIGINAL POST.
"B, I don't know why we bother replying to Sobers actually."
Call it a counter-rant: an opportunity to make the point that you can't build your way out of a housing price bubble. I haven't done the research, but I am sure housing price bubbles predate land use control.
B: "you can't build your way out of a housing price bubble"
Not once it gets going (see recent experiences in Ireland, Spain, parts of USA).
"I am sure housing price bubbles predate land use control"
Correct. The USA managed a near-perfect run of six consecutive 18-year land-credit booms-busts between 1830s and 1920s, uninterrupted by Civil War and First World War, I'm quite sure there were little or no land use controls at all.
Mark, if Land was Capital, by taxing it we would expect to see a change in economic activity. Is this correct?
Everything we say or do wrt LVT is a total anathema to politicians and state bureaucrats (except my late Father-in law who was a DV and would have loved LVT as he was a Top Bloke) since it massively takes money and power away from them. Which is of course another BIG reason to love it. Unless you are Stiglitzian and think that State intervention aka spending, subsidising and taxing is a Good Thing. Conversely, if you are truly Stiglitzian you ought to love LVT as it takes out a lot of his (in my view mythical) information assymetries and market information failures.
Overall though the functionaries and politicians will fight like Hell to deny that LVT works better than anything else, and that's the prime issue that has to be tackled.
So how's that going to happen by next Tuesday? (I am not a patient man(.
One more thing, seeing as this thread is Questions Questions, in Pigovian taxes we tax activities that do harm to society and compensate those who bear the costs.
So, if we tax Income are we compensating those who are unproductive (you know who I mean). Surely this is only fair?
BS, land simply isn't capital, it's land.
Location rents are location rents, the community (or society in general, or the nation-state, or whoever) generates them so they 'belong' morally to the community and the only practical way of doing it is by taxing the location rents and dishing out the proceeds as a Citizen's Dividend (i.e. the median household in the median home receives a CD equal and opposite to their LVT bill).
As it happens, by taxing land rents (and untaxing income) there is a huge boost to the economy, this has been proven in fact and stacks up perfectly in theory as well. And those who can't compete can just move somewhere cheap and live off the CD.
L, it's going to take a bit longer than next Tuesday I'm afraid.
BS, I'm not sure I understand that question. I've got nothing against alleviating poverty, that's what the CD is for, the flip side is that without income tax etc there'd be more economic activity and more jobs so there'd be fewer poor people in the first place. And fewer meddlers to look after them (think A4E).
MW, it was not really a question, more an attempt at sardonic humour. Please disregard.
A couple of points.
1) Land value has to be continually sustained by public expenditure or it dwindles away.
2) There is a positive feedback effect which causes credit-fuelled land price bubbles. In engineering and electrical systems, positive feedback leads to instability and oscillation, which is exactly what we observe in the banking system/land market relationship. LVT introduces negative feedback which stabilises the system.
Marx and Pope Leo XIII both did a fine job in confusing land and capital. The latter conflated the two and described them as property.
Sobers, a house plot with planning permission in Sunderland is worth bugger-all, a house plot with planning in Chelsea is worth the best part of a million. The difference is location value.
Land titles are ultimately derived from the Sovereign authority which grants them and protects the title under law.
The Lockean concept of land ownership is nonsense. Libertarian politics is built on the idea and is consequently nonsense too.
BS, aha, thanks.
Phys, agreed to all that.
"BS, land simply isn't capital, it's land"
So what is "capital" then? I'm quite happy to include land as an asset (like cash, buildings, machinery, goodwill, stock etc) but what does that leave as "capital"?
B, in the very narrow sense, "capital" is accumulated labour (or accumulated labour plus materials) so it's buildings, machinery, know how etc.
"Money" is not really anything, it's a unit of measurement and not a thing in itself. It's a measure of the value of teh potential future claim on other assets, it's a kind of ownership; and if you owe money, then you owe part of your current or future assets to somebody else.
"Asset" is too vague a term, physical land is clearly an "asset", as is cash in the bank, as is true capital, as it being good looking or healthy.
"Goodwill" is another tricky one. It might arise because somebody is simply better at something than everybody else, in which case it's just an estimate of your future income; or it might arise because of a quasi-monopoly position (because you have a captive customer base, i.e. a Ford owner needs to buy spare parts from Ford).
So land rents are a special kind of "goodwill", if you see what I mean.
Sobers, in case you're still reading, I uploaded a quick MSPaint diagram to imgur explaining what your "90%+ of land values are determined by the status of planning permission" means. What you mean is that R-squared of a model regressing house price on planning permission status must be higher than 90%. I quickly sketched out what that means.
http://imgur.com/SlIuD
Coming back to this three years later, I now know I was confused by the word "rent". You can "rent" capital but this is not economic rent.
The difference between land and capital is that the returns to land cannot be competed away: you can make more capital but not more land. That's why the returns to land are economic rent, and the returns to capital are not.
JJ, exactly.
We could refer to "hiring equipment/capital" and "renting land" is you wish.
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