Economic Myths: There is a free market in land

Homeys always dismiss the claim that land ownership is a monopoly by pointing to the fact that land is subdivided into millions of bits with a wide spread of ownership; and claim that it cannot be a monopoly as anybody can buy or sell land at the same price.

Clearly, land IS a monopoly (or at best a cartel), we can tell this from the simple observation that the income you can receive from (most) land vastly exceeds the cost of producing or holding land, which are precisely zero. These unearned profits can only be monopoly profits. There is no other possible explanation for them, or else they would have been competed away years ago (wouldn't everybody like to get money for doing nothing?).

For sure, the value of land is increased by buildings and improvements, which might be integral to the land itself (drainage, protection against cliff falls etc) but the income which relates to the buildings is very much 'earned" for these purposes. The only factor affecting the location rental value (or "site premium") is what 'everybody else' is doing in the surrounding area, i.e the location.

And for sure, there is some limited competition between the owners of neighbouring plots on any street, but there is no real competition between the owner of a plot in a good location in a town centre and plots in a poor location in a marginal area. Perhaps the marginal area wins the battle for more government funding and goes upmarket, then that is largely at the expense of existing good areas. The playing field can be tilted this way or that, but it is the same water sloshing around in the puddles.

Let's see if I can reduce this to a couple of simple analogies which even the most stubborn Homey has to grasp (although there ability to not grasp analogies never ceases to astound):

1. Diamond mining/selling is (or used to be) controlled by a monopoly/cartel called DeBeers. There is no point DeBeers saying "Oh no, we don't have a monopoly, because anybody can buy or sell diamonds (i.e. second hand ones)", DeBeers still has (or had) a monopoly.

So the fact that land can be bought and sold and that nobody is prevented from buying it, and that purchasers by and large compete on a level playing field (i.e. whoever bids the highest can buy it) does not stop land itself being a monopoly any more than the fact anybody can buy and sell diamonds.

2. The same goes for oil. Let's assume that the Saudis control such a large share of output (directly or via the remnants of OPEC) that they effectively have a monopoly. It's not much consolation to the motorist that refining and retailing petrol is a free-ish market and that the motorist can choose between competing petrol stations. Ultimately, you are buying your petrol from the Saudis (or some other producer whose interests are closely aligned with the Saudis), and they have a monopoly.

3. Imagine a government-run electricity company which has the monopoly over mains electricity supply in an area with a million people. That is clearly a monopoly.

4. "But I don't own all the land in my area, I am just one of hundreds of thousands of people who all own small plots. None of us has a monopoly and we do not collude" wail the Homeys.

5. So what? Now imagine that the electricity company is privatised and each resident is given one share, for free, which has a value of £1, and which can be bought and sold on the Stock Exchange, and the price fluctuates in line with other shares. Superficially, there is a "free market" in those shares. But does the company still have a monopoly? Of course it does.

6. What if you want to buy shares in the company. You can only buy them from somebody who already owns shares in that monopoly. So the owners of the shares are a cartel; the number of shares cannot be increased or decreased (unless they are consolidated or sub-divided, which is irrelevant). So the company earns monopoly profits (let's assume there's no price regulation) and there is also a limited market in shares. Nobody can come along and create competing shares. So the owners of the shares form a cartel, and when you buy shares, you have to pay a premium to join the cartel which owns the monopoly.

7. So it does not matter how finely sub-divided or how widely held the shares in a monopoly are, it is still a monopoly. It makes little difference whether all the land and sea in the whole of the world is owned by a single landowner and everybody else rents or whether the physical land is divided into seven billion equal value plots and every human being is given one. Land is still inherently a monopoly. The rent or purchase price you'd have to pay to occupy any particular plot is unaffected by whether the current owner merely owns that one plot or lots of other plots or all the land in the whole world. The rent or price you'd have to pay is quite simply "at least as much as the next highest bidder".

8. Nobody acting in isolation or any cohesive group not large enough to be able to form their own "state" and control land by force, can arrange for all the infrastructure to be built and for a stable and law-abiding society to build itself up to create rental values. Rental value is something which all human beings create, i.e. all who happen to be present somewhere at some time (or near enough to able to influence it).

9. If burglars and car thieves are known to be active in an area, then yes, those few humans beings pull land rental values down in that area, but Wadsworth's Law of Conservation of Rents applies here as anywhere else: those burglars and car thieves push up the rental values in other areas which now count as "low crime areas".

10. "If you don't like it you can go abroad!" shout the Homeys. What difference does that make? Land is the same monopoly everywhere. If mains electricity is supplied by a different monopoly in each town, then moving from one town to the next doesn't help you, you are always buying it from a monopoly at monopoly prices.

Here endeth today's rant lesson.