.

SUMMARY AND REPRISE

Land and capital[22] are mutually exclusive categories, provided that "exclusive is understood properly.

a. Some of each is essential to production.

b. They are not mutually convertible. They are substitutable (see above), but convertible is different. Capital and labor in the long run (not very long, for most capital) are fungible pools as they reproduce and replace themselves, generation following generation. That is, all capital is convertible into any other form of capital when it is replaced. It is not convertible into land. That is one implication of "mutually exclusive." 22. We do not address here to what extent "human capital" blurs the distinction of land and capital. We do note that economists who would "tax consumption" by taxing the formation and maintenance of human capital, while exempting the consumption of land, are involved in massive contradictions.

Capital is fungible in the long run, i.e. every unit or "molecule" is convertible to any other. Labor is slightly less so, and the generations are longer.[23]

Thus, all capital tends to earn the same rate of return at the margin. There is a "pool" of capital, whose returns are subject to common influences. The labor pool is more differentiated, but still, all wage and salary rates are subject to common influences through the interflow caused by competition and mobility. In the long run, replaceability of capital makes individual "capitals" totally fungible, i.e. perfect substitutes for each other -- but not for land. So it is, too, with labor, without the same perfection.

Land rents tend to rise and fall together, too, being subject to common influences: direct demand, indirect demand via commodity prices, input costs, wage rates, and real interest rates.

B. Major Economic Consequences

B-1. The origin of property in land is not economic

a. Politics guides the original distribution. The initial distribution of land - the origin of property in land - is military, legal, and political, not economic. The prime business of nations throughout history has been gaining and defending land. What was won by force has no higher sanction than lex fortioris, and must be kept and defended by force.

After land is appropriated by a nation the original distribution is political. The nature of societies, cultures and economies for centuries afterwards are molded by that initial distribution, exemplified by the differences between Costa Rica (equal partition) and El Salvador with its fabled "Fourteen Families" (Las Catorce), or between Canada and Argentina.

Political redistribution also occurs within nations, as with the English enclosures and Scottish "clearances," when one part of the population in effect conquered the rest by political machinations, and took over their land, their source of livelihood. Reappropriation and new appropriation of tenures is not just an ancient or a sometime thing but an ongoing process. This very day proprietary claims to water sources, pollution rights, access to rights of way, radio spectrum, signal relay sites, landing rights, beach access, oil and gas, space on telephone and power poles (e.g. for cable TV), taxi licenses, etc. are being created under our noses. In developing countries of unstable government the current strong man, perhaps hanging by a thread, often grants concessions to American adventurers who can bolster his hold on power by supplying both cash up front, and help from various US and UN agencies from the IMF to the United States Marine Corps.

Ordinary economic thinking today would have it that a nation that distributes land among private parties by "selling to the highest bidder" is using an economic method of distribution. Such thinking guides World Bank and IMF economists as they advise nations emerging from communism on how to privatize land. The neutrality is specious, at best. Even selling to the high bidder is a political decision, as 19th century American history makes clear.

i) The right to sell was won by force, is not universally honored, and must be kept by continuous use of force.

ii) In practice, selling for cash up front reserves most land for a few with front-money advantage, inside information, good contacts, corrupt aides, etc. The history of disposal of US public domain leaves no doubt about this -- and it is still going on with air rights, water, spectrum, landing rights, fishing licenses, etc. Choices being made currently are just as tainted as those of 19th century history (with never a peep from Chicago, but heavy applause).

Selling land in large blocks under frontier conditions is to sell at a time before it begins yielding much if any rent. It is bid on by those few who have large discretionary funds of patient money. Politicians, meantime, treat the proceeds as current revenues used to hold down other taxes today, leaving the nation with inadequate revenues in the future.

iii) The ability to bid high does not necessarily come from legitimate saving. The early wealth of Liverpool came from the slave trade. High bidders for many properties today are middle eastern potentates who neither produced nor saved the wealth they control. Other high bidders are criminals, who find the "sanctity of property" a splendid route for laundering their gains, and a permanent shelter against further prosecution.

Apart from such obvious cases, more generally, control over front money, however honestly acquired historically, is a factor separate from the ability to use land productively. This is addressed below, in B-8.

This matter of the origins of property in land is skirted, ignored, obscured, or trivialized by Libertarian (neo-anarchist) philosophers, e.g. the Chicago School, and their lead is followed by the mass of economists today.[24] It is the Achilles' heel of these and allied philosophies. One of these, the contract theory of the state, was heavily used to sell Proposition 13 in California in 1978. Howard Jarvis, the author and protagonist, repeated daily that "Property should pay only for services to property, not services to people." "Services to property" he construed very narrowly indeed.

Ownership and tenure rights derive only from appropriation, not saving, investment or production. Capital, by contrast, is owned by those who formed it. Only after that does capital bear much resemblance to land in that they coexist. Standard micro economics obscures the differences because it deals mainly with relations of coexistence, ignoring the continual formation and destruction of capital, ignoring time and relations of sequence. Thus it excludes from its purview the differences between land and capital. Micro deals mainly with how existing resources are allocated at a moment in time, not how they originate, grow, flourish, reproduce, age, senesce and die.

b. Privatization is dominated by giveaways and resultant "Rent-seeking, which warps allocation. Another thing libertarian philosophers must paper over is the rent-seeking that occurs in the creation of private tenures. They avidly push privatization as the Panacea, but ignore the process of privatization and its consequences. Private tenure is often granted under customs that make it a prize for occupying or fixing some capital on land, and continuing to operate it with "due diligence" ("use it or lose it"). Premature investment, settlement and development are frequent results, seriously distorting the allocation of land, labor and capital and contributing to the "Congested Frontier" problem (cf. B-2, infra.)

Some assets privatized this way, de jure or de facto, include England's North Sea oil (where it is called "performance bidding"); water in the 17 western States of the U.S.A., and four western provinces of Canada; the radio spectrum; licenses to pollute air ("offset rights," in EPA-speak); U.S. farmland under Squatters' Rights (1841) and the Homestead Act (1862); U.S. and Canadian railroad land grants; fishing quotas; farm production and acreage quotas; cartel shares; utility franchise with duty-to-serve; etc. < style="font-family: times new roman,times,serif;">

The tolerance of neo-classically-trained libertarian economists for such distortions knows no bounds nor shame. A current example in California is their push to convert conditional water licenses into permanent property rights. They would give the present licensees perpetual, alienable property not just in the water, but in past and ongoing government subsidies to build and operate the water distribution system.

c. Inertia takes over after the original distribution, perpetuating and aggravating it. Inertia, both financial and political, transmitted through generations by inheritance, is a major control over the distribution of wealth and income. How else can one explain their hyper-skewed distributions, in contrast with the normal distribution of most human abilities? Inertia extends the original pattern for generations. More, the advantages given by controlling discretionary funds (those not needed for subsistence) magnify the original political result.

(Mention Marx's "Primitive accumulation.")

(Mention importance of WTA vs. WTP research findings.)

"Positive" economists and Libertarians, who fancy they have found in private property rights a "value-free," apolitical basis for thinking about and structuring society, have to paper over the political origins of landownership. If one's grandfather was a slave when the Land Office was parcelling out Federal lands to the friends and cousins of corrupt Congressmen, one may be excused from believing Utopia will ensue from limiting all future changes to "win-win" Pareto-optimal changes from the inherited status quo. When "offset rights" to pollute the neighborhoods of the poor are granted today to those whose claim to the privilege is their history of polluting, the political basis of property being created currently shines forth unmistakeably, except to those who are hopelessly twisted by rationalizing the existing distribution of property.

WTA vs. WTP survey findings; their relevance and import.

d. Privatization is dominated by giveaways and resultant "rent-seeking," which warps allocation. Another thing libertarian philosophers must paper over is the rent-seeking that occurs in the creation of private tenures. They avidly push privatization as a grand Panacea, but ignore the process of privatization and its consequences. Private tenure is often granted under customs that make it a prize for occupying or fixing some capital on land, and continuing to operate it with "due diligence" ("use it or lose it"). Premature investment, settlement and development are frequent results, seriously distorting the allocation of land, labor and capital and contributing to the "Congested Frontier" problem (cf. B-2.)

Some assets that are privatized in this way, dejure or defacto, include England's North Sea oil (where it is called "performance bidding"); water in the 17 western States of the USA, and four western provinces of Canada; the radio spectrum; licenses to pollute air ("offset rights," in EPA-speak); US farmland under Squatters' Rights (1841) and the Homestead Act (1862); US and Canadian railroad land grants; fishing quotas; farm production and acreage quotas; cartel shares; utility franchises with duty-to-serve; etc.

The tolerance of neo-classically-trained libertarian economists for such distortions knows no bounds nor shame. A current example in California is their push to convert conditional water licenses into permanent property rights. They would give the present licensees perpetual, alienable property not just in the water, but in past and ongoing government subsidies to build and operate the water distribution system.[25]


B-2. Much land remains untenured
Access to land is open by nature until and unless land is appropriated, defended, bounded and policed. No one claims land by right of production; no producer must be rewarded to evoke and maintain the supply; and submarginal land is not worth policing, unless to preempt it for its possible future values, or to preclude anticipated competition for markets or labor. Centuries of human customs have developed around regulating common use of lands with open access.

Tenure control of some land tends to drive the excluded population to untenured land (the "commons"), creating an allocational bias unless all land is either tenured or common. Thomas N. Carver styled this the phenomenon of "The Congested Frontier", and he might have added backwoods. Land which is partly common today includes parks and public beaches, streets and highways, water surfaces, wild fish and game, and some at least of the "wide open spaces" in less hospitable regions. Today there are homeless people for whom life would literally be impossible without some form of access, however precarious, to untenured land. Some of it, ironically, is near the centers of large cities, where the price of land is highest.

No great damage is done if submarginal land is untenured: it won't be used anyway. There may be damage, however, when rentable land is untenured. It attracts too many entrepreneurs with too much labor and capital, leading either to the use of private force to establish tenure - unjust, dangerous, and wasteful - or overcrowding and waste, called the "dissipation of rent," when the average cost of the average firm equals the average product of labor and capital. Fisheries and open range are classic cases.

Some land of high value is untenured or underpriced because consumers resist paying for what they think of as "free" because it has no cost of production, and which nature continues to supply even though the price is too low to ration the land economically. Examples:

• water whose natural source is in southern California (it is tenured, but underpriced);
  
• city streets for movement and parking space, even in New York;
  
• air and water used for waste disposal in populated areas;
  
• housing that is subject to rent controls;
  
• popular beaches and trails;
  
• oil and gas subject to field price controls; and so on.

When land is open to public access, so maybe the capital used to improve it, e.g. paving of rights-of-way. Such capital may also suffer the "tragedy of the commons" of excessive congestion. This open access to capital is mainly an incident to the lack of land tenure - a characteristic more of land than of capital as such.[26] Remember, capital occupies space, but land is space.

It is also possible to legislate and subsidize open access to some kinds of labor and capital services, e.g. public health measures, and education. These differ from common lands in that they are not open "by nature," but by art and public expenditure.


B-3. Landownership imparts superior bargaining power

Labor starves, in contests of endurance; land endures.

A landowner is also a person with labor power. He or she can earn income like any worker. Landownership gives income above that, which gives discretionary spending or waiting power.

In contests with capital, land has the greater waiting power because over time capital depreciates, while land appreciates. Thus landowners (when free of heavy taxation) are noted for their patience. Patience is the essence of bargaining power.

Because land is fixed, more ownership by one person or group means less ownership by others. To expand is to preempt, unavoidably. Thus, the expanding agent necessarily weakens others by the same stroke that strengthens himself. Landownership often gives market power in the sale of specific commodities and services. See B-11.


B-4. Land Rent does not evoke production, thrift or investment

Land rent, however high, does not raise the rate of return (ROR) on investment in land purchase. It may sometimes lower ROR in the formation of true capital.

a. Land rent does not determine interest rates. There is a worldwide market for capital, flawed to be sure, but quite operational. Capital flows tend to create a common, worldwide and industrywide rate of return on capital, based on the productivity of capital as demand and the urge to consume as a limit on supply. With this the rent of land has nothing to do, directly. There is no rate of return on creating land; no common level of land rents. Higher rents do not increase the return on investments and pull up interest rates; they are capitalized into higher land values, using the given interest rate which is determined by the supply of and demand for capital, not land.

If the return to capital rises in a place or an industry, capital flows in until the rate of return on new investment falls to the common level. The excess returns to capital are competed away. When land rents rise, on the other hand, the excess returns are imputed away, meaning the land becomes and remains more valuable. Arbitrage pushes up land prices, using the interest rate borrowed from the market for capital where it is determined. This creates an illusion of a return that results from buying land, but acquiring land does not build the asset that yields the return. The return comes first, and exists regardless of what is paid for it; the price derives from the return (cf. A-4).

In terms of ordinary cost theory, land price is part of Fixed Cost (FC). As demand rises, average fixed cost (AFC) rises enough to soak up all excess returns. As it is sometimes put, land's "cost" is not price-determining, but price determined. Calling it a "cost," and lumping it with other costs, has tended to hide this difference in obscurity, ambiguity, and a touch of mystery, which are the basic tools of sophistry.

If land rents do affect interest rates it is not by increasing the productivity of and demand for capital. It is likely to be the reverse: high asking prices for land can cut into and reduce the return to capital. In short, high building prices raise the demand for investment; high land values lower it.

Whether high land values do or not reduce returns to investors depends on whether they are properly high -- i.e. they reflect the high productive value of land -- or overpriced, in a cost-push phenomenon. Over-pushing building rentals does happen, but vacancies result and correction is likely, especially when the building is on the steep gradient of its depreciation and obsolescence curves.

Overpricing land titles is common - witness all the vacant land in and around cities. It may go on for years before it is recognized and corrected, especially when land is on the steep gradient of its appreciation curve, and near an edge or ecotone (zones of change of land use) of conversion to higher use. Ordinary theory obscures this, to the extent that it treats land at all, by calling land rent a "residual." Landowners in real life are not so passive: they get paid up front when they sell to builders. (Demanding high ground rents in long term leases to builders is also common and has similar effects.) When this occurs it lowers the rate of return on building. Where the land is paid or contracted for up front and on fixed terms, the building only gets the residual.

b. Existence of land value actually lowers saving rates.

i) Land value substitutes for real capital in portfolios and thus lowers the need to create real capital. This is the same effect that historians have noted about the negative effect of slavery on capital formation. It is part of the "wealth effect." (The other part is lowering incentives to work, and raising incentives to allocate both land and capital to personal pleasure instead of earning cash by serving others.)

High land values may also affect interest rates indirectly by reducing saving and the supply of capital. The existence of high land rents and values, like the ownership of slaves, tends to satisfy the need for accumulation of assets without any actual capital formation.

ii) Rising land prices are net income to individuals. Most of net income is normally consumed. "Equity withdrawal" is a common form that this takes. Another form is letting land appreciation substitute for a capital consumption allowance as capital depreciates.

c. Investing in land is macro-economically sterile. It creates neither income nor capital. Socially, it is a wash: one buys, one sells, nothing else happens.

d. Public policy needs to promote capital formation but not land creation. For creating land, thrift is not needed, nor can it avail: no man can create land. Thrift creates no land, and the value of land, however high, stimulates no thrift. Land rent may be taxed heavily without discouraging capital formation. Indeed it would certainly encourage capital formation to lower the level of land prices, because there is a diminishing marginal utility of assets to private holders. The loss of land values would stimulate new saving to make up the loss.

e. Land price is unrelated to cost of producing land. The present value of land is not derived from nor caused by nor related to its cost of production. It has none. Present value is derived solely by discounting future ground rents, which are not a reward or incentive for creating land.

With capital the sequence is that persons save to form capital, a lump sum, which then yields a service flow. Capital formation precedes and causes the service flow. With land the sequence is reversed. The service flow is a free gift which simply exists. The buyer does not create it, nor cause others to create it; he simply acquires it. The expected service flow is then converted by arbitrageurs (economic men) into a lump sum present value. That process is called "capitalizing," i.e. making land superficially resemble capital for purposes of exchange. However, it is land price that adjusts to a given rent, rather than rent's being determined at a level sufficient to reward producing the asset. The interest (or capitalization) rate at which rent is converted to price is determined by the supply of and demand for real capital, not land.


B-5. Land rent is a taxable surplus

2004 version : [See "Tapping land rents after Prop. 13." Deal with wealth effect.]

a. Relative elasticities.

Land rent is nearly identical with taxable surplus. This follows from simply observing that the supplies of labor and capital are highly elastic, while the supply of land (within any given taxing jurisdiction ) is totally inelastic, because a "jurisdiction" is defined as a specific area of land.

François Quesnay and the "Physiocrats," and their fellow-traveler A.R. Jacques Turgot, deduced from the above that almost all taxes, whatever the nominal base, are shifted to land rents, and lodge there. Market forces tend to equalize all AFTER-tax returns to labor and capital, because of their mobility or, in the case of some labor, the inability of humans to survive on less than subsistence wages.

As a corollary, if there is no rent there is nothing to tax. E.R. A. Seligman in one of his exhortations against the single tax, warned that a marginal community -- one on land of no value -- can have no tax base if it taxes only land. However, this hypothetical community can have no tax base anyway. Whatever labor or capital it tries to tax will leave, or never arrive, because their supplies are elastic.

Capital will only appear to bear a tax if it can shift it to land in the form of lower rent, or a lower purchase price. If rent and land values are already zero, there is nowhere to shift a tax. Mobile factors will not bear it, but turn away. Customers will not bear it, but buy elsewhere.

Seligman does not consider the interesting possibility that public services paid by taxation might create the very rents that are taxed to support the public services. That complex question would make an interesting book, but one too long to insert here.

b. The surplus is much more than usually stated.

c. The writer has dealt with this elsewhere (Gaffney, 1970, 1993), and is currently writing a book on the subject. Cf. also B-12. The failure of modern economists, whether neo-classical or heterodox, to acknowledge the Himalayan Range of land values in their faces, and to reckon its role in theory and policy, is denial and delusion on a scale at which one can only marvel.


B-6. Uniformity in taxation between land and capital is not neutral
a. Land and capital are non-interchangeable, and mutually exclusive.

Refer back to A-6. Land is not convertible into capital, nor vice versa. Individuals may exchange one for the other but that does not change the quantity of either.

The fact of non-convertibility gives a new meaning to the ordinary concept that "uniformity" in taxation is neutral and desirable in all cases. Uniformity is desirable to avoid "excise tax" effects, but that end does not require uniformity between land and capital, only uniformity within each class. (Refer to Ramsay rules, citing standard texts.)

However much the capital be taxed, it will not be converted into land. By definition, it cannot be. Likewise, however much land be taxed, it cannot be converted into capital.

It follows that "uniformity in taxation" only has merit within each class, not among them. The ideas that we should tax all income uniformly, or all property uniformly, have no merit from an efficiency standpoint.

Many State constitutions are perverse in this regard, allowing discrimination among uses of land, but not between land and capital.[27]

b. Taxing capital is non-neutral per se.

Heavy taxation of capital in an open jurisdiction will abort marginal investments and thus lower the intensity of all land use. It will thus distort the allocation of capital among Jurisdictions, driving it away from the taxing jurisdiction, generally to its disadvantage. It will also favor less intensive land uses within the taxing jurisdiction. The effect of a property tax based on the value of capital is the same as a rise in the rate of interest. The rule is, "If a tax varies with the use to which land is put, it is biased for the use more lightly taxed."

Putting it in substitution terms, taxing capital induces substituting land for capital. This occurs simply because capital is taxed, however, and not because it is taxed more than land. It occurs whether land is taxed at a higher rate, the same rate, or no rate at all.

For neutrality, the rule then is to avoid taxing anything except land. Nonuniform taxation is necessary to avoid taxing capital, and thus to avoid nonneutrality. The ordinary argument for uniformity gets it backwards.

d. It is impossible to tax capital uniformly.

The points (a) and (b) are the stronger because capital is never taxed uniformly anyway, and cannot be. No jurisdiction even tries to include personal consumer durables in the tax base, notably excepting cars in some states. Most states exempt all personal property; some exempt large parts of it. Personal property is concealable, movable before assessment dates, and generally impossible to treat uniformly. Exempting all personal property is no solution: it opens a wide bias against things bolted to the floor, as well as against floors themselves, and walls and roofs.

The only way to tax capital uniformly is to exempt it all. The way to exempt it all, without going completely anarchist, is to raise the rate on land, which can be assessed uniformly.

d. It is impossible and undesirable to tax consumption uniformly.

2004: Cite Ramsay rules.

Note irony. What are pushed today as taxes on "consumption" exempt land consumption.

Sales taxes and VATs in practice tax many things in cascade, and others not at all. They bear on capital formation in human form, and exempt consumption of land's time-slots. To call them what they are, they are taxes on exchange, and the necessities of the poor, the middling, and parents of all levels struggling to create and maintain human capital.


B-7. Land values are hypersensitive to discount rates
The sensitivity of present values to discount rates increases as the value being discounted. Land values are discounted from more remote future values than are values of most capital, even most durable and "fixed" capital. Consider land yielding an expected constant cash flow: let the interest rate double and the present value is halved. Compare the present value of a steer to be slaughtered in one year: let the interest rate double from 5% to 10% and the present value drops from .95 of slaughter value to .91.[28] Even that overstates it a lot because we haven't accounted for the feed bill, but never mind, the point should be clear.

Let buyers expect land's cash flow to rise annually by a growth coefficient, G, and the valuation formula is cash flow divided by the interest rate minus the growth rate (I-G), rather than I alone. Now let the interest rate double, and the present value is cut to less than half.

Or let land be yielding a nominal current cash flow and to be held in anticipation of a higher use to begin 10 years down the road, and thirty years after that to be renewed for an even higher use. Let there be a whiff of oil, or the floating value of a shopping center, or the possible extension of a freeway and a new water supply paid by others. Let there be a fear (or hope) that Washington will debauch the currency sometime again in this century, or that another Howard Jarvis will cut land taxes some more, or that future building costs will fall: any and all of these, which are common and familiar expectations, make present values of land more sensitive to discount rates than in the simple basic capitalization model which is based on assumed constant cash flow in perpetuity.

Expectations like those denoted above by G, or like the anticipated higher future use referred to, are "a state of the public mind" (Richard Hurd, Principles of City Land Values). They are incapable of proof or disproof in the present and, whether proven true or false in the future, will have lost relevance, to be replaced by new expectations of new futures that unfold endlessly as time passes.


B-8. Land markets are dominated by access to long-term credit
Individual bidding power is hypersensitive to one's Internal Interest Rate (IIR). This follows from B-7.

a. Financing purchase ranges from difficult to impossible. Few assets are priced so high as land, relative to cash flow. Financing a purchase of land therefore presents an unusually high credit barrier to the builder, new businessman or hopeful homeowner. Cash flow is seldom adequate to cover interest on a full loan, let alone the principal. The buyer must find the excess elsewhere. A poor credit rating raises the interest rate and increases the difficulties. Even a middling credit rating is not good enough to open entry to most businesses, and a weak one excludes a large minority from homeownership.

b. Land purchase is not self-liquidating. Because market agents expect land to last forever they price it accordingly, high enough so the net cash flow just covers interest on the price, with nothing left over to pay for the principal. Thus the land buyer will never normally (or "in equilibrium") pay for it from its own cash flow, as he will pay for capital assets. The debtor will never retire the loan from the cash flow of the land, but only from other saving, or from new windfalls not expected at time of purchase. A new buyer with no equity, therefore, is a bad credit risk and gets short shrift at the bank.

c. The corollary of high land price is high carrying cost relative to cash flow. Carrying cost is interest on the price of land. It varies with one's internal interest rate (IIR). For those with high IIRs, the carrying cost of land normally exceeds cash flow. Otherwise put, cash flow from land seldom covers carrying cost, while cash flow from depreciable capital covers more than its carrying cost because it normally has to be priced low enough for cash flow to cover both interest and depreciation. As to inventories of rising assets like steers or timber, they are like zero-coupon bonds: there is no cash flow before sale, but the famine leads to a feast of total recovery.

Since land lasts forever while demands for land grow, the normal expectation over long periods is that ground rents will rise. Present land value includes the discounted values of expected higher future rents. This makes current land values very high relative to current cash flows, which are less than expected future flows. In stock market terms, the Price/Earnings ratio of land is high, like that of a growth stock. This is more than an analogy, since a large share of the assets of corporations consist of land. In the USA, corporations are the major landholders.

d. Credit barriers are barriers to equimarginal allocation of land. Those of poor credit ratings are peculiarly handicapped in the market for land titles. This is because the carrying cost of land is interest, and because there is a structure of interest rates based on borrowers' credit ratings.

Because of the difference in carrying cost the financially strong add land to their holdings to a lower margin of productivity than prevails on holdings of the financially weak, whether we measure productivity in cash flow or service flow. This is a factor independent of and in addition to the fact that the financially strong likely place a higher current value on service flows (i.e. the amenities of land) of given objective quality.

It is often reinforced in practice, too, by the greater political power that accompanies financial strength. The combination of factors may lead the land market far away from anything approaching an efficient equimarginal allocation of land among competing firms and households, to such a degree that traditional micro theory loses much of its explanatory power and the market becomes a travesty of the Platonic ideal in the textbook.


B-9. Control of land gravitates to financially "strong hands"

a. Landownership accretes around existing nuclei. Few people can invest heavily in an asset of high price and deferred yields. Those who can do so have a field with fewer competitors than most, and tend to expand widely. As Loyd Fisher, a rustic Nebraska land economist twanged to me and others 30 years ago, "When a rancher buys these days it ain't the quarters roundin' out, it's the sections gobblin' the quarters."[29]

Those with existing cores of rent-yielding land -- "existing nuclei" -- enjoy a continual flow of discretionary funds they can use to buy more land. The advantage of a head start snowballs over time.

Buying with equity funds is only the beginning. Land is the basis for extending credit. The "sections" go to the banks for accommodation to buy the "quarters." As Rainer Schikele wrote, "The basis of credit is not marginal productivity, but collateral security." A major factor giving one a good credit rating is the prior ownership of land.

Thus, owning land is not just dominated by, but also dominates access to long-term credit. Here is a positive feedback loop: it takes good credit to buy land, and prior ownership of land gives one good credit. Those already owning land have access to more land at a lower carrying cost than those trying to enter the market from poverty. The result is a tendency for land to agglomerate in the hands of the financially strong (cf. B-8).

Just why some should want to expand so much as to be "alone in the midst of the earth" has puzzled man gentler souls than Isaiah. Thorstein Veblen never turned his acidic irony to better account than in his last book, Absentee Ownership, describing acquisition for acquisition's sake:

Subtraction is the aim of this pioneer cupidity, not production; ... being in no way related quantitatively to a person's workmanlike powers or to his tangible performance, it has no 'saturation point'.

"Their passion for acquisition has driven them ... ; their slavery has been not to an imperative bent of workmanship and human service, but to an indefinitely extensible cupidity ... [which] is one of those 'higher wants of man' which the economists have found to be 'indefinitely extensible', and like other spiritual needs it is self-authenticating, its own voucher.

"The Latin phrase is auri sacra fames (fanatical[30] lust for gold), ... They [the Romans] had reached a realization of the essentially sacramental virtue of this indefinitely extensible need of more; ... The object of this 'higher want of man' is no longer [gold], but some form of [certificate] which conveys title to a run of free income; and it can accordingly have no saturation point', even in fancy, inasmuch as [certificates of title are] also indefinitely extensible and stand in no quantitative relation to tangible fact....

"They have always, ... wanted something more than their ... share of the soil; not because they were driven by a felt need of doing more than their fair share of work .... but with a view to ... getting a little something for nothing in allowing their holdings to be turned to account....... T. Veblen, Absentee Ownership, 1923, pp. 138-40.

As Veblen taught, what is true of Nebraska sections and quarters is equally true of giant and small world corporations. The worldwide merger mania of the insatiable '80s followed the same pattern. Beneath the corporate veil, most corporations are large collections of real estate: industrial, commercial, agricultural, mineral, transportation, communications, and utility real estate.

b. It follows that landownership is highly concentrated. Land is a major basis, probably the major basis of the concentration of wealth. Political distribution, if egalitarian, may stave this off for a considerable time. There is also evidence that heavy land taxation, where that is applied, motivates subdivision. However, experience is that, in the absence of heavy taxation, the surplus of rent attracts absentee investors, and large concentrations reconstitute themselves inexorably. The writer and others have documented such concentration elsewhere.[31]

What concentration means for bargaining power has been foreshadowed in B-3. What it means for market power is treated in B-11.


B-10. Land markets are sticky

Land sellers, compared to sellers of other factors, are too weakly motivated to make very efficient markets. In the basic sense, the land market is efficient if it guides land to its highest and best use, yielding the most economic rent. Time was when that would go without saying, but the semantic cleansing of theory has muddled it up. I do not use "efficient market" in the tautological sense of some rational-expectations theorists, which I have heard from a Rochester economist, wherein markets are efficient almost by definition because all agents are assumed to know what they are doing, and outside observers are not allowed to question it. Neither do I use efficient in the arbitrage sense, where a land market is called efficient if individual buyers of land make a reasonable return compared with their alternatives.[32] I am looking at basic social efficiency. There are many reasons why land markets fail.

a. Weak seller motivation. The services of land perish with time. This is a strong social reason for seeing that land is well used. It is also a private motivation which makes the market work, such as it does. If we looked only at this factor in isolation, we would infer that land markets work well.

Land is similar in this respect to capital. But capital also suffers from depreciation, obsolescence, spoilage, theft, and vandalism, and requires outlays for maintenance, protection, insurance and storage. Labor services also perish with time, when labor is unemployed; but unemployed labor also starves. Thus seller motivation is much higher for labor and capital than for land.

b. Waiting for Godot. Some of land's current service flow may be put into storage, for example if the land is growing timber or young fruit trees. In this, land is not unique. The service flow of the capital in the trees is similarly "plowed back" into the growing capital.

But the flow of land service may also be stored in a way peculiar to itself. Landholders may defer permanent improvements while land "ripens" into a higher use, higher enough to repay with interest the loss of one or more years' rent flow.[33]

Strenuous efforts are made by some economic theorists to rationalize land withholding on these grounds. "Rational expectations" theorists have developed a paradigm wherein any investment decision is presumed rational and socially benign, to know all is to forgive all, and the burden of proof is on anyone who questions an individual landowner's behavior. Whether that kind of rationalization will long succeed, or whether widespread "holding for the rise" will again be recognized as evidence of market failure, there is no doubt that it occurs on a grand scale, and much land is thus held back from current use.

Withholding is also rationalized as waiting for greater certainty. This involves a fairly transparent fallacy of composition (although it seems to be opaque to those economists who make much of this point). The waiting landholder imposes uncertainty on others who are waiting to see what he will do, and of course vice versa, such that uncertainty motivates waiting, and waiting generates more uncertainty, in a vicious "positive feedback loop".

Waiting landholders collectively also impose costs on the public, which has at the very least a prior investment in national appropriation and defense of the land, and usually heavy investments in public infrastructure which await private response. It is a situation where the gains of waiting accrue to the private landholder but the costs accrue to others, a clear condition for market failure.

c. Limited competition. There is no new supply of land, as there is of capital due to current capital formation (cf. A-3). It was for this reason that Adam Smith and other classical economists called landholding a "monopoly". They did not mean there was just one owner or seller, but referred to the absence and impossibility of new supplies. They referred to a return, rent, in excess of costs needed to induce production. They referred to the fact that entry of competitors is limited to the holders of the given supply. Some moderns belittle the classicals for using monopoly in a different sense than what has become customary long after their funerals, but such an anachronism is patently unfair. They knew what they were saying.

Land rent is not wiped out by competition. Instead, it is imputed away, silently disappearing into "Fixed Cost". Higher demand for land in general evokes no supply response: rather, it simply raises the whole structure of rents. There is usually increased supply of the gross produce or service from land owing to more intensive use, but it comes from the same land. The additional output results from increments of labor and capital applied to the same land. Cf. B-4.

d. Lags in reallocation. There is a sort of supply response to increased demand for one use of land, and reduced demand for another, because land use can be changed in response to a new structure of rents. Many micro theorists, focusing narrowly on economics as "the allocation of limited resources among competing ends," advance this to aver that land is as mobile as capital. However, reallocating land has tight limits. It is uncommonly slow because land is mostly committed to existing uses, encumbered with durable capital specialized to the existing use, and as yet not fully depreciated. Only a fraction of the potential change occurs in one year. In addition, potential reallocation is often limited by the spatial fixity or other qualitative peculiarity of specific lands. Tundra and Alpine meadow cannot be converted to the loams and warm climate of the corn belt; Utica cannot move to Manhattan, nor Dubuque to Chicago, nor Death Valley to Newport Beach. The essence of land value is location; it is not easily duplicated, and of course totally stationary, by definition.

The most favorable case for supply response is where the growing use is of high value and the shrinking one of no value, as with a city growing out into a desert. Here the change of land use is even tantamount to increasing the aggregate supply, it is said or implied by some Chicago School theorists.

One problem with such a model is that deserts do not spawn great cities: even Denver, Phoenix, Albuquerque, Salt Lake City and Los Angeles all developed in oases of intensive farming. As cities spread they destroy part of what they serve and what serves them, and the reverberations ripple out vastly. Land boundaries are common and interdependent, so a change in one ecotone entails "repacking" entire regions, a long, sticky, disruptive process indeed. Expanding cities send out shock waves into the surrounding farms that travel through the entire hierarchy of farm land uses, as higher uses displace lower uses, from market gardens down to sheep grazing. Even grazing is not the lowest use: it then pushes on forestry and recreation where it finally meets the wrath of the Sierra Club (with headquarters in downtown San Francisco and offices in Washington, D.C.). Growing cities also destroy part of the natural beauty that many people value so highly that they devote their lives to protecting it.

e. Lack of homogeneous land. Las Vegas, not a typical city, is the largest I know of that indeed grows in worthless desert. Here another factor stands out clearly: new lands are peripheral and only imperfect, partial substitutes for central land. The city must range farther for water, power, waste disposal, raw materials and markets.

The high marginal cost of adding to spreading cities, and the low true net value of the additions, are concealed, in our culture, by an elaborate and pervasive system of subsidies and cross-subsidies built into our institutions and political power structures. These drain the old centers to feed the fringes. In a systemwide accounting we find the true social cost of urban sprawl as we know it today to exceed the gains at the margins. We are not so much adding land to cities as wasting capital, dissipating central rents to do it. Thus the private rent gradient and resulting land-value gradient that we observe in the marketplace is much flatter than the true gradient that is hidden under the subsidies. Even so, the visible gradient remains impressive: values rise to $2,000/psf in San Francisco, Chicago and Manhattan, and $25,000/psf in Tokyo.

Land of rare and limited qualities is often the basis of market control: retail sites, rights-of-way, rare ores, water rights, are familiar examples. Even land of less rare qualities is often used for market control. American farm output is controlled by means of acreage limitations; Texas and now OPEC oil production by oil well protates; and so on.

f. Lack of turnover. Now consider the market for land titles. This is the more relevant market as to building, transferring land between uses, and changing parcel sizes. If the market for land services is slow, the market for land titles is viscous. There is no flow of supply, none at all. There is no real turnover in the sense of producing and using up. There is only ownership turnover: the market only transfers existing titles.[34] (There is a supplemental market in long leases, not addressed here.)

There are few highly motivated sellers, as there are motivated sellers of spoiling produce and obsolescing computers and vehicles. Median home-owners are motivated, when transferred to another region. Few other land sellers come close to that degree of motivation (and the median home represents more capital than land). Capital depreciates; goods spoil and obsolesce; idle labor starves; but land silently rises in value.

The aggregate of all land changes hands slowly, with one or two percent turnover of ownership annually (measuring the stock by value, not number of parcels - smaller, cheaper parcels turn faster). But buyers often need adjacent land, or land in particular districts or with particular qualities, and find little or no land on the market, or land controlled by one seller.

The slow ownership turnover cited above applies to total real estate, i.e. land including any buildings on it. Ownership turnover is even slower for bare land. If the average building lasts 50 years, only 2% of the land is available for re-use in any given year. Only a fraction of that 2% is for sale; the rest is renewed by the same owner. Whoever wants to buy available land in any particular area is unlikely to be faced with the "many sellers" premised by the competitive model.

g. Hoarding for vertical integration. A common precaution against sticky markets is buying excess land for possible future expansion. This behavior makes markets that much more sticky. It is one of those things that necessitates and justifies itself, considered in the aggregate: it is self-aggravating and self-authenticating. When anyone buys and holds for his own future expansion, everyone has to: it is a positive feedback loop of possessiveness run wild.

The composite result of individuals' buying for future contingent need is that the market in raw land is turned to glue. It ceases to serve the median person in time of need. The effect is a species of vertical integration and, like all vertical integration, it destroys the free market in raw materials and vastly inflates the aggregate need for holding raw materials. This is because the pooling effect such as the market provides inherently. That is, the grocer obtains, stores and keeps a wide variety of food and sundries on tap for thousands of customers. Lacking a grocer, each customer would have to maintain her own stores, and the aggregate required would far exceed that in the common grocery store. A good land market would likewise keep land on tap for the contingent needs of all, greatly lowering aggregate needs.

h. Assembly. In certain ecotones (zones of change of land use) the technical need is to assemble small parcels into larger ones, as where commerce, industry and high rise are moving into a district of single homes on small lots. This condition maximizes market failure. It normally takes years to assemble an optimal parcel: one holdout can spoil years of negotiating and financing.

Straw buyers and front men are used to keep principals and their intentions secret. Speculators are everywhere, trying to assemble large plots or hold up other buyers. Whole districts are held by anonymous absentees; buildings deteriorate, neighborhoods lose their natural leaders and stabilizers, and communities disintegrate leaving slums and blight, crime and arson, public charges and vandalism.

The sum of those factors makes for an inefficient market in land titles. Everyone who can tries to acquire land for his own future expansion. Timely subdivision may be foregone in anticipation of future assembly problems, skipping an entire generation of optimal land use. Neighbors adjusting lot lines have only each other to deal with. Aggregate landownership is highly concentrated because of the small numbers who can invest for deferred yields; the number of sellers in one district or for one use is more narrowly limited because of spatial immobility and low turnover and impossibility of new land creation. Financing is especially difficult because the asset is not self-liquidating. Many holders are waiting for the rise, and/ or for greater certainty to be provided by the advance commitments of others who are in turn waiting for them. Net result: wasted, underutilized land.

i. Institutional stickiness. Land is traditionally subject to a host of legal and customary limits on use and ownership. Covenants are found in land titles: seldom in titles to cars or canned goods. Divided ownership is common, there is so much about land to be owned. There are easements through, air rights over, mineral rights under, and neighbors and zoning all around any parcel of land. Changing lot lines is unavoidably a social process, there is no other way.

A large share of the more valuable land in cities is held by estates. Public and eleemosynary [non-profit] holders are preferentially tax exempt and often without any visible motive to economize. Water licenses are held subject to "use it or lose it" traditions leading to appalling waste. Broadcasting/telecasting licenses are highly political. And so on. Only a resource with the characteristics of land could be subject to such a wide range of non-economic pressures.


B-11. Land is a major basis of market power

We have seen that landownership conveys superior bargaining power (A-?), accretes around existing nuclei (B-9,a), and is highly concentrated (B-9,b). We have seen markets are sticky. It follows that landownership is a natural basis of market power.

a. Expansion is zero-sum. Amassing land is always done, can only be done, by shrinking the holdings of others. To expand is to preempt. If A is to have more then B, C, D et al. must have less, there is no other way. A can amass more capital by saving, creating new capital, leaving B, C, D et al. with as much as before. A can increase his labor income by working longer, or harder, or smarter, producing more, leaving others with as much as before. He and she together can also spawn more children: labor, like capital, is reproducible, and indefinitely augmentable. Possessing land, however, means just one thing: bumping others.

In the region of the mind, the thing possessed may be shared by all with no diminution to anyone. No one's pleasure In Shakespeare, or Beethoven, or understanding physics is any less because at the same time millions of others have the same pleasure. Art, letters and science are the common property of mankind, open to all who care to acquire them. The creative producer's pleasure is in proportion to the number with whom he shares. The gratification is from sharing, not excluding. The contrast with landholding is nearly total.[35]

Amassing claims on wealth by creating and producing is not, therefore, a threat to others. Amassing capital through saving does not weaken or impoverish others. Producing goods does not interfere with others' doing the same. One producer may drive another from a particular limited market, but glutting one market increases real demand for the products of other markets, and raises the real value of others' incomes by lowering prices. Amassing land, however, has to deprive others, both relatively and absolutely. Concentrated holding and control of land, therefore, have always been threats to the well-being of those left out.

Conversely, the only way the landless, e.g. in South Africa, can get land is from those who now have it. "Growth" is often advanced as the solution to maldistribution, injustice and poverty, but that is mere temporizing because land does not grow. When production and demand grow, land rents rise. Of land it is starkly true, "the problem is not production, but distribution". There is no production; only distribution.

b. Land is a natural base for monopoly and monopsony. Massed control of land is the most natural base for monopolizing markets because land is limited. Buying land always does double duty: when A expands he ipso facto preempts opportunities from B. For example, a chain of service stations with most of the best comers in a town has market power, the more so if it also holds a large share of oil sources, of refinery sites, of "offset rights" to pollute air, transmission rights of way, harbor sites, and other such limited lands.

Preemption is not always just a by-product of expansion; it may be the main point. For example, in 1993 Builders' Emporium, a large chain of California hardware stores with large parking lots in good locations, closed down and sold out. The sites were bought up by the largest grocery chain in southern California, Vons Company. According to news reports, this is "a shut-out strategy against competitors." Vons will convert 6-8 Emporium stores to Vons' markets, and "hold onto the others until commercial rents rebound -- then market them to non-rivals."

Salomon Bros. analyst Jonathan Ziegler, far from being shocked, praises this as "ingenious." "You're controlling who's in your market area." Ralphs, another grocery chain, had been looking for sites and is now shut out. The stores remain empty today; the land idle.

At the same time, the two largest warehouse retailers in southern California have merged and shut stores. These are Costco and The Price Club. In a third case TCH, the parent of Thrifty Drug Stores, is buying up PayLess Drug chain from its parent, KMart, making a chain of over 1,000 stores. They are shutting many of the stores. An independent retail consultant believes they are shutting them as part of the sale negotiations.

The social purpose and rationale for private property and land markets is to get land into its best use. When preemption overrides use, market failure is total; private property is discredited.

c. The differentiation of land is permanent. If monopoly were based simply on owning a particular form of capital, all the other capital in the world could be converted into the monopolized form each time it is liquidated and the proceeds are reinvested. The same is not true of land, whose specialized qualities are permanent (see A-3 and B-10).

Land with differentiated special qualities is fixed, e.g. land on Wall Street, or land suitable for growing macadamia nuts, or unloading ocean vessels, or relaying radio signals; or residential land within the New Trier Township High School District, or with ocean views and breezes. Substitution is generally possible but only at higher costs, resulting in rent gradients out from the best locations. This phenomenon is well studied and associated with the names of Von Thunen, Ricardo, and many modem location theorists.

This quality makes land a natural basis for oligopoly control of markets, or attempts at control. Land bearing certain minerals, like diamonds or oil, is fixed and limited, in spite of new discoveries and technologies. Sites most suitable for refining oil are limited: they must be near markets, with access to cheap water transport and pipelines, with "offset rights" to pollute air, with "grandfather rights" to endanger or downgrade surrounding residential lands and occasionally spill oil, with access to rails and a freeway system and a labor pool, with vast backlots for tank farms, inside supportive political jurisdictions, and so on.

The fixity of land also lends itself to stability of association among oligopolists. People come and go; capital turns over, flows in and out; corporations, partnerships and syndicates are collapsed, merged, refinanced, bankrupted and reorganized. Land remains: it is always in the same place, unmistakably identifiable and findable. It is the permanent, underlying resource whose control is always the objective of the shuffling and roiling and strife above it. Its owners, whoever they may be, will reliably join and support the local employers' association and their respective trade associations.

d. Local market power. Tip O'Neil, the former Speaker of the US Congress, is oft-quoted that "All politics is local politics." One might say the same of market power. Some lands are sold or leased with covenants against competition, as Gimbel's Department Store holds a covenant on a lot adjoining its parent store on 3rd Street and Wisconsin Avenue, Milwaukee. Such anticompetitive arrangements, however blatant, are intra-state, and apparently immune from sanctions under US Federal anti-trust laws. Scholars of industrial organization, many of them doing outstanding work otherwise, pay these grass-roots matters little heed. Researchers and activists concentrate on commodity markets at national and world levels - the ones subject to Federal sanctions, such as they are. They could probably find more severe and blatant market failure in local land markets.

Bargaining power increases with the number of options one has. A large landowner with a chain of holdings in different jurisdictions is positioned to bargain, to play off one against the other. Thus, the Disney Corporation, 1991-93, considered rebuilding and expanding Disneyland at its current site in Anaheim, or in Long Beach where it had tenure over another suitable site. Using this leverage it won concessions from both cities, "finally" choosing to expand in Anaheim. It has yet to do so, however, and nothing is really final. Disney has many other sites around the world.

Likewise, land is a basis for oligopsony power in local labor markets. A city's labor pool is often faced with a local employers' association whose membership is limited by the amount of industrial land within reach of the labor pool. Migrant farm labor is faced with statewide employers' associations who have the advantages of limited numbers, wealth, ancient roots and stability. Labor unions that organize a local plant are faced with the threat of the "runaway shop", or merely reallocating work among plants, when the employer owns plants elsewhere.

Custom has dulled us to it, but a corporation is a pool of separate individual landowners bargaining in concert. A century ago, corporations and limited liability were viewed with suspicion and apprehension. Today, hundreds and thousands of separate landowners pool their corporate strength against labor, as a matter of course. Some employees bargain through unions, but not as a matter of course, and hardly ever with international options. In the US, less than 20% of the labor force is unionized, yet many, probably most economists treat labor as the only threatening monopoly. They see corporations as benign; a prime cause carried by many economists today is to eliminate the corporate income tax completely. Would we saw such support for eliminating the payroll tax, the most obvious cause of unemployment.

e. Land is the basis of cartels. There is too much farmland to permit of monopoly control through private action. However, production controls are exerted through public action and force of law. These controls operate through control of land, limiting the allowable acreage in certain crops. Seldom is there any attempt to control other farming inputs like labor, fertilizer, farm capital or pesticides.

The best-known world cartel, OPEC, also works through control of a natural resource. It is important in its own right, obviously, but only one of a whole genus that it represents so conspicuously. There is a tendency for cartels to overexpand under the price umbrella they support, and then collapse, taking with them a lot of wasted capital. The effect of short-run monopoly may thus be long-run instability (cf. B-17). Either way, the effects are harmful and impoverishing.

f Land puts the lock on monopoly. A monopoly that limits output to raise price, or a monopsony that limits hiring, both throw workers on the street, and release other resources too. Why do not these workers and these raw materials combine in new firms? The monopoly would defeat itself if they could. Clearly the monopoly must preempt some key bottleneck. Land is the most likely one, because of limited supply and non-reproduceability. Somehow, ordinary micro "price theory" never addresses this question.[36] It is crippled by the absence of one leg: land.

B-12. Land income is much greater than the current cash flow

a. Appreciation is current income. The income of depreciable capital is cash flow less depreciation. The income of appreciable land is cash flow plus appreciation. That is quite a difference.

With land held for appreciation there is no cash flow to disclose the high values and the steady accrual of gains in wealth. This quality of "silent accrual" is found in land surrounding cities, or growing retail centers, as well as in land considered potentially mineral-bearing. Other land is valued for expected higher future cash flows in its present use, or some higher use to come. Some land is valued for future "plottage" increments from assembly, or "negative plottage" from subdividing.

Professors Haig and Simons have given their names to the standard definition of income which includes unrealized appreciation of durable assets like land and corporate shares as current income. Stock brokers and real estate brokers habitually do the same thing for the trade. They may appear to question it when lobbying for tax breaks, at which time some say it is "double taxation" to tax both current cash flow and appreciation. When selling stock or real estate, however, unrealized appreciation is unequivocally touted as current income, and correctly so.

Some even deny that appreciation should be taxable income at all. Yet, no one denies that depreciation should be a deduction from current taxable income. This asymmetry and glaring contradiction generally passes unremarked. It could only survive if never challenged in the profession, which apparently it is not. "Land," with its tendency to appreciate, is not in the abridged lexicon.

b. Landowning yields large non-cash service flows. Land income also includes service flows other than cash. Because of its versatility, and fundamental character, land often yields service flows in kind, that never pass through the market place. For example, land used for homes and owner-recreation yields no cash flow at all, but has high value.

It is common for economists to write of the "imputed income of durable consumer capital." especially owner-occupied houses, and occasionally to persuade some political candidate to advocate including their imputed income in the income tax base, or at least to end the deduction of interest and property taxes paid on house values. Those making such proposals, unfortunately, fail to exercise reasonable care in distinguishing houses from land. Much or most of the non-cash service flow received from consumer capital proper is not income at all, but two other things: a return from operation, maintenance, and upkeep; and a return of capital. Depreciation and expenses offset more than half the service flow from most owner-occupied houses, especially middle-aged buildings on the steep slope of the depreciation curve. The service flow from land, on the other hand, is pure income.

The measure of this imputed land income is not subjective nor fuzzy. It is interest on the market price of the land, a measure of its opportunity cost (cf. B-14 and A-2). Alternatively, it is the periodic ground rent on comparable lands.[37] This could easily be included in the base of the present income tax, converting it in one stroke into a national land tax.

Forest land yields cash only once in decades. Some land is valued mainly for ancillary benefits like the preferential access it gives to adjoining lands for grazing, recreation, water rights, waste disposal, information gleaned from mining, etc. Other land is held for its contingency value, for example for possible future expansion. Some is held preemptively to freeze out competition, and some is used (under current US income tax laws) to yield non-cash tax shelter benefits.

Part of farmland value is an amenity, especially of course in pleasant places. The value of lands held for the owner's recreational pleasure is non-cash. Part of the value of media ownership -- spectrum or newspaper sites -- is power and prestige. Business sites in Newport Beach give access to water recreation; in Cambridge, Mass., to intellectual stimulus and hobnobbing. The list of non-cash service flows from land is much longer and is limited only by one's observation and insight.

A 19th Century Briton put it like this.

"The objects which men aim at when they become possessed of land in the British Isles may, I think, be enumerated as follows: (1) political influence; (2) social importance, founded on territorial possession, the most visible and unmistakable form of wealth; (3) power exercised over tenantry; the pleasure of managing, directing and improving the estate itself, (4) residential enjoyment, including what is called sport; (5) the money return -- the rent."

-- The 15th Earl of Derby, 1881[38]

In Ireland, during rent wars, boycotts, etc., landlords "had long decided that Ireland would yield few of the spiritual delights of land ownership." This resulted in lower prices for Irish than English land.

c. Land income is a prior claim, not a "residual."

d. Land income is a large share of national income. Throughout history the prime business of national governments has been to gain and keep land, mainly by force and threats (cf. B-1). The prime business of politics has been to apportion lands among the winners. A third business is then to subsidize them in various ways. It is most inconsistent, then, when the winners of all three battles counter tax proposals by pleading poverty, saying their land has little value. How little value it has may be gauged by playing "what if?" What if the English, with all their capital, were removed to Antarctica? What would be their national income?

Less drastically, we might just ask what the owners would sell England for? A common way to trivialize land values is to play "what if' the owners tried to sell it all at once.[39] What if, instead, we went to buy it all? Much of it has been off the market for centuries, with reservation prices effectively infinite.

2004 note: NEEDS WRAP-UP.

B-13. Consuming land means preempting its time
To consume most goods and services is to use them up. Land is not used up. "Consuming" land must have some other meaning, therefore, than the intuitive and common idea that consuming means turning-to-waste. To consume land is rather to preempt its service flow without impairing its substance. To consume land is to occupy it for a time-slot, which may be as brief as beating a red light or (rarely) as long as the pyramids last.[40] After us life goes on, on the land once left to us which we then leave to others. "Time-sharing" was not invented by the holiday industry but is inherent in the nature of land and life.

How shall we measure land-consumption by owners, where no rent is paid? Is it purely subjective? Does it vary with the owner's mood and health? It is simpler than that, and fully practicable. The essence of consuming land is preempting the time-slot from others. Thus, holding land without using it, or using it below capacity, is a form of consumption. The measure is the market opportunity cost of land, i.e. the price times the interest rate.

Holding an urban site has been likened to holding a reserved seat at a play, sporting event, or concert. The ticket holder properly helps pay for the event, whether or not he is there to enjoy it. As a result, very few paid customers fail to show up. Likewise, people who pay cash rent for land seldom leave it vacant. Doubtless if people paid regular cash taxes to hold land, they, too, would consume (preempt) less.

Proponents of "consumer taxation" almost universally overlook this point. I am not aware of one who has proposed including land-consumption in the tax base. Aaron and Galper, propounding a "cash-flow tax," explicitly allow for letting each succeeding owner expense land purchase, effectively exempting land rents from taxation 100%.

Theirs, and other proposals, and consumer taxes actually imposed now and in the past, bear heavily on the necessities of median families. We deride the salt tax of the French ancien regime, and of pre-Ghandian India. We recognize them as instruments of tyranny and class warfare, even as we tolerate modem legislators who impose comparable burdens on ourselves, and economists who rationalize such taxes by belittling the necessities of life.

Doing so, they compound the deception in the label "consumer taxation". Much of what is taxed in the name of taxing consumers is actually used for capital formation: human capital formation. The same economists who say human beings are or contain capital, turn around and tell us to tax the formation and maintenance of such capital, by calling it "consumption'. Coupling this with their proposed exemption of land-consumption we have the ultimate victory and application of semantic cleansing. Inconstancy, thy name is -- neoclassical economist?


B-14. Land's rent is its opportunity cost, regardless of use

Land is a prior claimant on the product. This has been obscured by calling rent "a residual." Land income is not a residual, but a prior claimant. This means land rent is a much larger share of national income than national. accounts presently show.

The unreaped harvests of idle land flow like water wasting through a desert into a salt sea. Lost water may sometimes be useful downstream; lost time never returns. To keep others from using a time-slot is to consume it.

A great deal of land in fact is not allocated to its highest and best use. The value of preempting this land is the highest and best use that might have been made of the land preempted. That is the economic cost. The land is not responsible if the manager fails to realize its value at optimal capacity. Neither are the persons who are excluded. Only the preemptor is responsible, as a manager. This person is the residual imputee who deserves credit for performing above par and blame for failing below.

. (See Addenda, #2.)

Most economic theorizing has failed to bring out this point. The tendency is to treat ground rent as a residual, a waste basket for all the errors and dereliction of responsible economic actors. (Note dereliction of those who say cost is opportunity cost, but fail to apply that properly to land, when estimating its value.) This has resulted in greatly understating the value of land relative to other factors of production. Institutional and social factors, too, often obscure the opportunity cost of land.

This is a case where theorizing lags behind practice. In dividing value between land and a building affixed to it the standard practice of appraisers, and speculative buyers too, is the "building-residual method." The land is appraised as though vacant; the building gets the remaining value, if any. The building, once attached to a specific site, loses the mobility of place and form that fluid capital possesses and has no opportunity cost but scrap value, which is often negative. Land, always lacking mobility of place, retains mobility of reuse because of its versatility, permanence, and irreproducible location.


B-15. Land value is hypersensitive to the environment (Canary in the mine)

Because of fixed location land value reflects its surroundings. Good and bad spillover values lodge in land rents because they are locational and the affected land cannot escape the bad, nor avoid sharing the good.


B-16. LAND USES THAT STINT ON LABOR SPELL UNEMPLOYMENT

B-17. THE LAND-SURFEIT OF SOME, WHEN UNCONSTRAINED, SPELLS HOMELESSNESS FOR OTHERS

NOTES

22. We do not address here to what extent "human capital" blurs the distinction of land and capital. We do note that economists who would "tax consumption" by taxing the formation and maintenance of human capital, while exempting the consumption of land, are involved in massive contradictions.

23. Gene pools may remain distinctive over generations, partially limiting interchangeability. We will not try to settle here the perennial quarrel of heredity vs. environment.

24. It is also ignored by most of those who call themselves "Austrians" after the great Austrian economists of the 19th Century (although one of these, Wieser, made much of the difference between land and capital, and even Hayek criticized Frank Knight for seeking to obliterate any distinction).

25. This is heavily documented in M. Gaffney, "Whose Water? Ours."... and "What price water marketing?"

26. The question of public restrooms is unpleasant but essential. It is a question whether to describe this as access to public capital or to the waste-disposal aspect of land, but viewed as the latter it is as undeniable a natural right as one can imagine. The late Arthur Becker was one of the few to elevate this lowly, embarrassing topic from being a subject of evasive scatological humor to the philosophical/ethical level it really deserves. A society may quickly be read, and in part judged, by its public restrooms. Consider this jointly with the matter of the homeless in crowded cities.

27. It is most likely that these provisions were adopted consciously for the overt purpose of thwarting any popular movement towards high tax rates on property. There is no cap on land tax rates that may be home without destructive incentive effects. These constitutional provisions in effect shelter land rents behind the incentive needs of building investors.

28. More accurately that is from 1/1.05 to 1/1.10.

29. For those unfamiliar with the American township survey system, as "section" is 640 acres or one square mile; a quarter is 160 acres.

30. The Latin sacra means either accursed or holy, the emphasis depending presumably on whether described by a critical observer or one possessed. "Fanatical" seems to capture the double-edged meaning being relished by Veblen. It should give pause to many modern econmists with their weakness for treating self-interest as The Holy Spirit.

31. "Who Owns Southern California?"; "The Property Tax is a Progressive Tax"; "Adequacy of Land as a Tax Base"; "Falling Property Tax Rates and Rising Concentration"; "Whose Water? Ours"; "The Taxable Capacity of Water Resources"; and other writings. Among other writers and sources cited are the following. Sources on earlier times include George, 187 1; Gates, 1978; Large Landholdings, 1919; Worster, 1985, pp. 98-1 1 1; McWilliams, 1939). Sources on more recent times include Worster, 1985, pp. 243-47, 291-302; Villarejo, 1982; Roberts, 1971; Fellmeth, 1973, pp. 3-25, 163-80; Gottlieb and Wolt, 1977, pp. 500-509; Landownership Survey, 1946; Wilson and Clawson, 1945; Goodall, 199 1; US Census of Agriculture, 1987, p. 16, 36, 84, 120.

32. This particular sophism may be traced back through Bodfish and Shannon to Charles Spahr.

33. See Kris Feder's study in Land Speculation and the Business Cycle, another volume in this series, and Lutz and Lutz (I 95 1). and Nic Tideman's articles in NTJ

34. New titles are created, too, but they only transfer land from common to tenured ownership. There is no real turnover of land.

35. Paraphrased from Upton Sinclair, 1923, The Goose Step.

36. Students of industrial organization are less inclined to sweep it under the rug, but have generally failed to give it the importance it deserves. A notable exception was the Texas institutionalist Professor Montgomery, author of The Brimstone Game, but where are the Montgomerys of today?


37. In 1992 the US Congress passed an energy policy law including a provision that the worker who receives a parking space from his or her employer must pay income taxes on its imputed value in excess of $155/month. The imputed value is simply what nearby or comparable parking lots charge. Employers are supposed to figure the value and include it on W-2 forms, beginning with 1994 taxes. (David E. Rosenbaum, 1994, "IRS eludes parking tax law." New York Times News Service. Riverside, California, The Press-Enterprise, 24 Feb., p. A-12.)

38 "Ireland and the Land Act," Nineteenth Century, October 1881, p. 474, cit. Roy Douglas, p. 17

39. Inconsistently, the very profession that accepts such trivialization is now advising Russia to do exactly that.

40. The other six "Wonders of the Ancient World" have all disappeared without a trace. Relative to land, human works are evanescent. "Like snow upon the desert's dusty face, lighting a little hour or two" they are gone.

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