Sunday, 22 September 2013

Desperate Straw Man Found. Now It's Idi Amin

I thought I'd post this link to an academic paper written by Zachary Gochenour and Bryan Caplan of George Mason University here, titled "A Search Theory Critique of Georgism".

In it, like all NCEists their main argument revolves around the fact the optimum use of any plot of land needs to be discovered, and that discovery has costs, which must be capital costs, therefore any tax upon land acts like any tax on capital i.e. there is no such thing as land rent.

Never mind there are dozens of examples of oil producing nations (including of course the UK, Norway, Libya, in fact, just about all of them) that have tax regimes in place that do tax this land rent for use as public revenue. That's ignored. Obviously.

More amusing is Caplan's assertion that any attempt to install a Georgist tax will result in a situation akin to Uganda under Idi Amin. Good KLN that. Original at least.

Anyway, the paper is littered with plenty of KLN's to keep us all entertained. But one did catch my eye, and perhaps worthy of comment.

"We do not mean to suggest that there is no merit in the idea of taxing relatively inelastic products as opposed to relatively elastic ones. However, we propose that there is nothing inherently special about land in this regard, and suggest that taxing of negative externalities (Pigou 1920, Baumol 1972) is plainly superior from an efficiency perspective."

Ignore the first KLN concerning the taxation of other inelastic products and consider his recommendation that Pigouvian taxes are plainly superior.

The thing is, LVT can be regarded as such a tax. It is the right to exclude under the law that gives land its value. We are all excluded equally (negative externalities). Under LVT we are all equally compensated.

Or we can regard monopolies as causing negative externalities. Again, LVT is just compensation for this.

Economists like Caplan flip flop around desperately trying to discredit LVT, but all they do is ultimately reveal the paucity of their arguments. It's all about protecting greed and privilege. Nothing else.


Mark Wadsworth said...

That's fairly traditional Faux Lib KLN, actually.

They say that if a tax is 100% of pure oil profits (selling price minus actual costs), then this extinguishes the incentive to extract oil or even to search for it.

No it doesn't, not in practice and not even in theory, because the "actual costs" include a reasonable profit margin for the extractor (his wages are a profit share for his workers), he's still perfectly happy to do it.

Simple thought experiment - the government owns a bit of land (or sea bed), it pays one group of people to work out how much oil there is (which they are happy to do) and then it hires oil companies to do the extracting (paying them $x per barrel).

The Faux Libs then extrapolate backwards to something much more mundane like buildings on dry land, and say that because the system doesn't work for oil (even though clearly it does), it can't work for normal buildings either.

This overlooks the fact that the "discovery costs" for normal areas are negligible, you just look up in the paper or online what type of building in that area sells or rents for the highest figure and build one of those.

Or you just build exactly the same as everybody else in that area - a house in a residential area, an industrial unit in an industrial area, a hotel in a tourist area, an office block in a town centre - you can't go far wrong with that sort of approach.

Mark Wadsworth said...

The other point is that we can quantify how much the site only rental value of land is and how much tax it could raise (£250 billion in the UK from a standing start, even ignoring dynamic effects).

These Faux Lib's always waffle on about Pigouvian taxes but never specify on what, exactly and how much such taxes they could raise.

Kj said...

This again. The "working paper" (hasn´t gone past this AFAIK) has it´s merits in just stating that search costs do exist, more so in resource exploration than in land in general, but manages to put up a big strawman argument against georgist taxation of rents that totally ignores what happens in the real world.
1. search cost for third parties aren´t discounted where there´s private ownership of rents.
2. search costs *are* discounted from tax where there are natural resource rent taxation.

MW: Yes, they never do explain exacly what negative expternalities. Car noise? Bad behaviour? Spouting nonsense that camouflages as academics?

Bayard said...

What interests me, is why do they bother? If LVT is such an unworkable idea, why spend hours coming up with arguments that convince no-one with half a brain. They should remember the line "Methinks the lady doth protest too much".

The Stigler said...

Idi Amin wasn't concerned about land, but wealth in general.

If it had just been about land, if the Asians had been landlords and nothing more, the economy wouldn't have collapsed like it did. The Asians would have been kicked out, the army officers would have taken over being landlords and all would have carried on as before.

Mark Wadsworth said...

Kj, your number 1 is a bit unclear.

Do you mean "There are no search costs for normal dry land, it's all on a map. The only search costs involved is deciding what to do with that land, whereby 'doing exactly the same as the neighbours' is usually a very safe bet."?

B, but there are lots of people with half a brain or less. The Faux Lib's take great delight in saying that "Rothbard debunked LVT a century ago".

Which ignores the fact that he said he agreed in principle and just saw a problem with working out the "site premium" which is of course a simple compare and contrast exercise.

Kj said...

MW: Yes, If I use time and money figuring out whether an existing property that I don´t own should be used for something else, I don´t get a discount for this when I try to purhase the property.

Mark Wadsworth said...

Kj, good point.

Having read the first few pages of this drivel, the smoking gun idiocy is on page 8:

"Landowners will engage in costly search to discover more information about the land (Stigler 1960): for instance... if the land can support a new type of building.

Rather than think of natural resources as an inherent quality of the land, from an economic perspective it is more accurate to think of them as being produced through the process of discovery and efficient extraction.

He searches for higher value uses for the land until the search costs exceed the expected benefits,"

On normal dry land, urban areas, the search costs (deciding what to do) are a few pence and that is all part of the cost of construction. The engineer has his own "search costs" on where to put the pipes, the bricklayer has his "search costs" deciding where to buy the bricks cheapest etc.

The second paragraph is la-la land. As Kj says, your neighbours have already done the "searching" and decided what it the most profitable use and you just copy them.

And of course, the "costs of extraction" do not form part of the site premium, they are part of construction costs - because when we are doing our compare and contrast exercise, what we end up with is the site premium - construction, search and maintenance costs are pretty much the same everywhere

And most buildings stand for fifty or a hundred years, there is a small initial search cost, and from there on in you are cruising.

By and large, once a building is finished, the best thing to do is leave it standing and collect rent.

It is only if you originally build a small shack and a whole town has sprung up around it that it is worth knocking it down and changing its use - and the search costs for this are bugger all, you just copy the neighbours.

Kj said...

Good summary. But for this is for regular use of surface land. It does get a bit more complicated in the resource extraction business, where search costs may be a significant thing.

benj said...

@KJ You are right, so a tax on super profits, auctions or a combo of both gets most of the unexploited value, which we all get an equal share.

Even so, oil companies are some, if not the wealthiest concerns on the planet. They seem pretty happy with Georgist taxation.

It's unfortunate we have politicians like Osborne willing to grant concessions for short term gain.

As MW pointed out, for site values it's a POP(piece of piss).

I particularly liked this bit

"Discovering any new type of use for the land could change
its market price, so those might count as improvements and be exempt as well.
Putting aside that this is not what George himself suggested, this argument is
self-defeating and ultimately grants the central theme of this critique: there is
no such thing as land rent, and every bit of information about the potential uses
for land could be considered an improvement."

A capital cost is an improvement, but it's not an improvement of the land itself.

So it's not self-defeating. Land is not Capital. Rent is not interest.

Why even try to argue the point?

Mark Wadsworth said...

"the central theme of this critique: there is no such thing as land rent"

Splendid stuff, splendid.

Land rents are easily measured as the difference in value between one plot and another plot.

If there is no such thing as "land rent", then all plots must be of equal value.

So if Gochenour and Kaplan have just inherited an acre of land in Manhattan, they won't mind swapping it for an acre of land in Outer Siberia.

benj said...

@MW, he he!

Yeah but, all those equations they use, to prove their point, you must be wrong;)

Mark Wadsworth said...

BJ, I love clever maths and so on, but they only get you so far.

Simple equation:

Acre of Manhattan = worth more than acre of Outer Siberia.

The rest is filling in the blanks.