Friday, 15 November 2013

Reader's Letter Of The Day

From the FT:

Land is a significant omission from economic models

Sir, The debate about "the new economics" (
editorial, November 13) fails to note the key omission from current models of the economy: the place of land as a separate factor of production.

Land, defined as all natural resources, should not be regarded as capital, since it is not a result of production and, unlike capital, creates rent, largely from location values.

Its omission from economic models has meant that land values have been ignored, even though these were the principal element in the house price rises that led to the creation of the subprime mortgages and other financial assets that caused the crisis of 2008.

A new analysis to include land, both in micro and macro models, would bring the whole subject into line with observable facts, including also the huge disparities of wealth in modern economies.

Brian J Hodgkinson, Oxford.


Derek said...

Good for Brian. I read his book on mainstream economics recast to include location issues a few years ago. It was a valiant attempt. Unfortunately mainstream economics has other problems in addition to the location ones, so his recasting is a big improvement but won't quite fix things. However he is spot on in calling for a new analysis.

Mark Wadsworth said...

D, Brian is top man and everything, but what worries me is the concept that "land is a factor of production".

It is for farming (in a physical sense), but apart from that, any payment for land is a ransom payment, pure and simple.

Land does not produce anything at all, ownership thereof merely allows you to prevent others from producing, so the landowner has the productive economy over a barrel.

It's not saying "I want to build cars so I need metal, rubber, skilled workers, electricity and machines".

Those are all factors of production (if one is missing, then no cars will be built), you could in theory set up a floating factory and not use any physical land at all.

Derek said...

The land issues that Brian was dealing with in his book weren't so much resource ones as location ones. Among other things he was talking about the fact that the source of rubber is perhaps 3000 miles from the factory which is perhaps 500 miles from the consumer and pointing out that therefore there are always transport costs as part of any exchange. Supply and demand diagrams need to take that into account but the standard analysis fails to do so.

Mark Wadsworth said...

D, Brian is one of us so I am sure his book is more nuanced.

It's just the "land is a factor of production" meme gets my goat. That sort of suggests that "land" takes part in the productive process and is due a payment, but being inanimate, the owner is sort of entitled to collect it on the land's behalf.

Fact is, it's not rent, it's ransom. Neither land nor the owner thereof play any part in the production whatsoever. If you believe in that, then you can just as well argue that "fresh air' plays a part in production etc.

Bayard said...

"that "fresh air' plays a part in production etc."

That reminds me of a sci-fi story I read where the concept of land had been taken to the next logical step, where not only land was rented out, but also space, so you were charged for every cubic metre of space you occupied above the land as well as every square metre of land. Obviously the cubes of space of which you rented were far more expensive if one side was land.

Mark Wadsworth said...

B, that's not science fiction, that's New York city.