Wednesday, 25 September 2013

More NCEisms

Following on from the "A Search-Theoretic Critique of Georgism" post earlier, I found this elaboration by one of the authors here.

Gochenour, gives us a valuable real life example of how landowners create land values, and therefore all Land is Capital etc, etc.

An illustrative example: say an undeveloped lot near a residential area is valued at $x, the sale price at auction.

The new owner, an entrepreneur, has local knowledge and believes that the lot is a good place for a business. He canvasses the neighborhood and decides to build a restaurant serving delicious BBQ sandwiches. He believes he has a solid chance of running a successful restaurant, so he takes the risk and embarks upon the project. Ten years later, the restaurant turns out to be a success.

Sadly, the restaurant burns to the ground in a freak conflagration. The rubble is cleared and we are left with an empty lot. But is it the same lot as before? Should it be valued at $x? Now, everyone knows a successful restaurant could be built here, before, no one knew. The “unimproved” value has changed. For that matter, the value of nearby lots is likely to have changed as well. What happened to the value of big commercial lots in semirural areas after the first successful Wal-Mart?


There are a couples of point here:

Firstly, the site described above had potential, which the search discovered (costs which the entrepreneur incurs before he bids for the site - he pays these in his capacity as entrepreneur and not in his capacity as landowner). The other people at the auction were too lazy, unimaginative, skint to put in a higher bid. Only later when the restaurant became a success was the full value of this location revealed. But it would have been revealed to anyone who built a well run enterprise from that location.

Can it really therefore be said, the restaurateur created the potential i.e. the added land value, or just exploited its full potential? What exactly was innovated? A tasty new way of BBQing ribs perhaps, but is that a new use for land? I'm pretty sure retail was discovered quite a long time ago.

If we take Gochenour's logic further, if someone naively pays too much for a plot of land, they are destroying land values? Personally, I think they are just an idiot. The only thing they've really destroyed is their bank balance.

At the end of the day, if any business has to include an under valued site as part of their plan, they haven't got a viable business.

Secondly, a lot NCEist use efficiency as a reason against LVT. What if in the example above the restaurateur had rented the plot instead. The landlord is in effect collecting private LVT. As we all know, had the restaurant been a rip roaring success he would have put his rents up.

So for consistency, as well as arguing against the public collection of site values on grounds of efficiency, NCEist's should also be calling for a ban on private landlords or for rent controls.

But, of course they never have and never will. Funny that.

11 comments:

Mark Wadsworth said...

Yes, thought experiment from KLN blog...

You and me are property developers and a vacant site comes up for auction at the edge of town where we can build a shopping centre or something.

The vendor is a pension fund, and the manager doesn't have much of a clue about land values so he just goes to the local estate agents who tout it round and offer a thirty year lease.

When the leasehold expires, the pension fund will buy back the building for an agreed % of its original construction cost as agreed between the parties (like they do in Switzerland).

As a special offer, another pension fund tells the estate agent that they are prepared to lend the purchaser cheap money, 5% fixed for thirty years.

So as aspiring capitalists, we do our sums and put in the winning bid of £10 million (we have to pay our search costs ourself, as do all the other bidders - it is the searcher who pays for this, not the landowner, you do your searching before you buy the land) and we have to repay £650k a year for the amortising loan, at the end we get our construction costs back, ignore those.

So it's all signed up, we all meet up to sign the paperwork, the mayor turns up with a photographer from the local newspaper while one pension fund guy hands over a £10 million cheque to the other pension fund guy, champagne corks are popped, secretaries' bottoms are patted and we all feel very pleased with ourselves...

Then guys from the two pension funds come over and tell us that we have been scammed.

There was no pension fund, the land belonged to the local council in the first place, and the money they "lent" us never existed, it was magicked into creation when we signed the purchase agreement.

So we are now effectively paying £650k a year in LVT to the local council for thirty years.

How is that any different to buying the land from a private purchaser and borrowing the money from a private bank?

Why would it be any different if the land "belonged" to somebody not using it and the council pays a developer to work out how much he would be prepared to pay and for what type of planning, and then grants planning for a shopping centre and slaps a £650k a year LVT or Business Rates on it?

Why is it in any different if the owner of a nearby shopping centre has an annual BR bill of £650k?

In all cases, the same value is created, the same activities take place, builders get work, retailers get premises, local people get job and shopping opportunities.

So where is the difference?

DavidECooper said...

Mark,

There really are cases where landowners changes the value of their land, even of the empty site.

A notorious example of value destruction occurred at 25 Cromwell St, Gloucester, home of serial killers Fred and Rosemary West. After the Wests were convicted the house was torn down, and to this day, the site of the house cannot be used for anything except a paved footpath. Its value is now zero- in effect it is 'cursed'.
No doubt the opposite could happen and a landowner could 'bless' the site... perhaps the site of the John Lennon's childhood home would benefit from this effect?

In your example, a restaurant owner does the seemingly impossible by running a successful restaurant in an unpromising site. He then sells out. Clearly by the time he sells out the perception of the site is changed. He has 'blessed' it and thus increased its value.

Land values change through the actions of society, and in some cases the social agent can be the landowner. Does this mean that 'land is captial'? Hardly.

Ben Jamin' said...

@DEC

You are comparing apples with oranges.

In the case of West's and Lennon's houses, the use of the sites has changed from residential to a contaminated site not fit for human habitation on one hand to a home/antique/theme park on the other.

They did not create more potential/value as a normal residential location. They didn't bless or curse it, they changed it's use.

Akin to a farmer getting planning permission to build houses on one of his fields. Did he create the potential? Did he create land values.

So, we then come back to the restaurant owner. Has he created potential or has he merely revealed it?

Remember, that to have created it would indeed mean land is capital.

Your phrase "seemingly the impossible" is the key. It may seem that he created potential, but he didn't. The potential for a successful retail operation was always there. He exploited it fully, and earned a healthy profit as a reward.

If it hadn't of been him, the next entrepreneur to have bought it would have too.

He didn't bless the land, it was already blessed.

Markets don't have perfect knowledge. If they did, the NCE position would be correct.

Mark Wadsworth said...

The NCEist gives the game away at the end of the excerpt:

"For that matter, the value of nearby lots is likely to have changed as well. What happened to the value of big commercial lots in semirural areas after the first successful Wal-Mart?"

And what did the owners of these plots do to deserve their good fortune?

Mark Wadsworth said...

BJ: "Markets don't have perfect knowledge. If they did, the NCE position would be correct. "

Ah, but what about the plot next to the successful restaurant? What if somebody does his research and buys it because there is going to be a successful restaurant next door?

He assumes that this will attract people to the area so he can later sell his site at a handsome profit to somebody who wants the spillover business, even though he hasn't lifted a finger in the interim.

All this talk about "search and discovery" is nonsense, that applies to every transaction, you always have to decide what to buy from whom, and all businesses do market research and pay for advertising, at an auction there will be several bidders who have done their homework etc.

Derek said...

Yup, the Gouchenor is obviously silly. The search and discovery process has no effect on the land. What it does have an effect on is the people who do the search and discovery. They end up knowing more than they did at the beginning. This is normally called "education", not "search and discovery".

Education may well increase land rents since it improves people's ability to use land productively, but it neither supports nor undermines the case for LVT.

fraggle said...

"For that matter, the value of nearby lots is likely to have changed as well. What happened to the value of big commercial lots in semirural areas after the first successful Wal-Mart?"

This is not a point about land, this is a point about knowledge. A standard Georgist point is that improved technology increases rents and this is simply another example of that.

This is really a debate about intellectual property. Can expressed ideas truly be considered private?

A similar mechanism is at work in the Fred West/John Lennon cases. Remember, land values are external. Fred West's home did not lose value when he did what he did. It lost value when people found out. John Lennon's birthplace did not gain value when he was born, but when, somewhere else entirely, he became known to a global audience and highly respected.

I think Gochenour is, like most propertarians, mistaking values being man-made for values being *owner-made*.

Ben Jamin' said...

@Fraggle

You're right. At the base is a philosophical belief that value can only be made by the individual.

Any notion that value might be a group effort is heresy, and anyone who believes that is a socialist.

Economists aren't scientists searching for truth, they are politicians trying to bury it.

Mark Wadsworth said...

F, D, BJ, I think you are making the same sort of point, an important one which the Faux Lib's overlook.

They say "Hooray for free markets" and what they mean is "A free market in ideas and knowledge".

I do not need to do great in depth research on second hand cars, I can safely assume that a second hand car on sale for £5,000 is probably "better" than one for £1,000.

If I am a farmer and notice that potato prices are going up and turnip prices are going down, then I shift my production from turnips to potatoes

So I am benefitting from the collective knowledge of everybody else, and they in turn are benefitting from mine.

"Free markets" are very much a collective thing and they generate extra value or profits for the whole of society.

The problem is monopolies (in particular land) where one small group benefits exclusively - as in BJ's example where the BBQ restaurant guy rented the premises instead of buying them.

AC said...

This does not seem like a 'real world' example at all. More like an example manufactured by someone who has very little knowledge of business or the Georgist position.

In the real world you can't just buy a plot of land and build what you want on it. Everything is zoned and change of use is difficult. If you are speculatively buying a plot hoping to get a change of use you are a land speculator profiting from the change of use. Not an entrepreneur creating value from innovation.

Neither is research into footfall and local markets demands innovation. It is just uncovering site value the same way a surveyor uncovers a site's dimensions.

As for site development increasing the value of surrounding sites that is the essence of the Georgist argument ! That it is investments (and zoning) around a piece of land that give the land its value.

Mark Wadsworth said...

AC, yup, that's the spirit!

It hacks me off no end that the Faux Libs are happy to assume that bricklayers will work for the same wages anywhere, that bricks and timber and cables cost the same everywhere, but that the "land owner" is a special breed who will only do anything for 100% of the location value.

So our landowner needs to receive only £10,000 profit if a house is to be built in a cheap area but £1 million is it is to be built in an expensive area.

Is the £10,000 not motivation enough? £30,000 is enough to motivate a bricklayer to work in a cheap area for a year and he expects no more or less if he works in an expensive area.

The Faux Lib's can't even distinguish between "the person who happens to own the land when it gets planning permission" and "the actual builder who buys the land off him with planning and organises the construction".