Why People Are Willing to Pay
High Rents on Land

Harry Pollard

[Reprinted from the online LandCafe discussion, 6 and 7 February, 2011]

6 February, 2011

I have defined my use of rack-rent as the highest rent that can be paid while maintaining production.

The payment of rent is exactly balanced by the advantage provided to the site. It is zero-sum. So when rent is paid - as it would be to the community in a Georgist economy - no reduction in wages occurs.

However, because of the monopoly characteristic of land - something that is essential to everything we do - landholders can ask for more than Rent and this extra will be paid so long as it isn't too much - that is so long as it leaves enough to labor for survival. This I dub rack-rent.

Check out Henry George's quotes I posted.

Whenever an advance in productive abilities takes place, so do rack-rents advance to mop up the higher wages that should be the result of the advance. Here is a story taken from Karl Eskelund. He was a famous Danish writer.

Published by: HENRY GEORGE FOUNDATION

HOW AID GOES WRONG A Cautionary Tale A Quaker enterprise in the Ganges Delta

The much travelled author Karl Eskelund describes the effort made by a band of young American and English Quakers in trying to assist some of the Indian population, millions of whom live at starvation level.

The young idealists took up their task in 1946 at the village district of Pifa, which lies in the Ganges Delta.

They were fully aware that their work would test their patience, for in India you can get no results 'at five minutes past twelve.' But after having outlined their plans to the peasants, the fishermen and the landowners - which met with general approval -they organised a co-operative enterprise for cultivating the land and marketing the produce. They set up day schools for the children, evening schools for adults, clinics et cetera.

After overcoming the initial difficulties, they saw signs of progress. Inspiration grew. Health conditions improved.

Everyone took a greater interest in their work and their earnings increased. New ideas took shape - there was advance along the whole line - an advance, slow but sure.

Only the landowners grew fatter.

Five years after the experiment began, Karl Eskelund visited Pifa and, with one of the Quakers as his guide, went through the village to see how it was faring. The Quaker had lost more than two stone and was as thin and spare as the natives. But what was worse, he had lost heart because the experiment had proved a failure. The day school still existed, but only one-quarter of the children attended it. The evening school had closed. The clinic was hardly used.

Agriculture, fishing and trade were back to the old methods.

Eskelund asked for an explanation of this fiasco. The young Quaker offered quite a number of reasons, none of which Eskelund could accept. Finally, he got to the root of the matter. This is what he says: "In the first year after beginning the experiment, both peasants and fishermen earned more than ever before. What was the result? The large landowners at once raised their rents and the smaller landowners followed suit. The peasants had to pay more for permission to cultivate the land. The fishermen had to pay more for permission to cast their nets on the flooded fields. In that way, practically the whole of the increased earnings passed into the landowners' pockets."

"The people of Pifa were unhappy at this. Nevertheless, next year they worked hard. Crops were plentiful, there was a rich catch of fish; good prices were paid for produce. At once, the landowners raised their rents still higher."

"The people then began to lose heart. What was the use if, for all their efforts, they got no benefit? Only the landowners waxed fatter. The peasants and fishermen did not become any thinner - they could not -otherwise they would die."

"Indians are ignorant, but they are not stupid. They can put two and two together. They had found themselves momentarily enriched by the new methods but, in the end, all the extra money went to the landowners. If one of the new ideas would not work, what faith could they put in any other novelties? Perhaps, after all, the old methods were the best." This is the story as far as it goes. It would be difficult to find an example that more simply and clearly demonstrates the truth of what Henry George had taught. It is that, as long as the private right to the rent of land obtains, so long will every advance, crystallising in land rent, be gathered by the owner of land; while he who works, he who produces, must toil the day long without gaining more for his labour than is enough to avoid death from hunger.

This story reveals the problem in all its simplicity; cleared of all that in civilised society makes it more difficult to see the importance of land.

The need to remould the whole system.

The young Quaker would not lay any blame on the landowners. There could be no objection against the landowners trying to gain as much as possible, and after all, there was nothing unlawful in owning land. The young Quaker admitted the immorality of the circumstances, but argued that it could be mended only be "remaking the law and remoulding the whole system."

Eskelund himself sees clearly the part the land question plays, and proposed the subdivision of land (by creating small-holdings). Yet he is not sure that subdivision will solve the problem. For he writes:

"Meanwhile, there is evidence that you don't get rid of landownership in that manner. Landownership is like the weed that always resprouts."

"The Indian peasant has a habit of using every penny he possesses to spend on festive occasions; when a son is born or when a daughter is married. If he has no cash he goes to the moneylender, who is often the landowner, the only person in the village who has ready money. Of course that is stupid of the peasant, but he has so little in hand. Already there have been occasions where a man who had become owner of his plot got into debt and had to forfeit his land. Thus he became a day labourer again, to toil for the same landlord as before."

Rack-rents - the highest amount that can be extracted from the tenant while maintaining production.

6 February, 2011 (separate posting)

I use the following example in the InterStudent High School Program to make the point that you will pay Rent - and a high Rent - to get the right site for your particular expertise.

A woman who is a world class milliner lives in Banning in the California desert. Many places have car license plates touting their great tourist attractions. This town's license plate is "Where the hell is Banning?"

She has a low rent shop in the town and makes a fair income selling to the local ladies. Then, she is persuaded to take a little place on Rodeo Drive in Beverly Hills. There she pays a huge rent, but has an immediate clientele who will pay high prices for her hats. She retires a millionairess.

She would have been stupid to stay in Banning where she pays just a low rent.

In similar fashion, if your shoe shop locates in a good part of the High Street with plenty of traffic, your rent will be higher, but you will be able to put your particular skills to work and earn a lot more money. In a lower rent area, those skills will mostly be unused. The Rent advantage does not increase your profits as Roy suggests. It provides you with the opportunity to make a good income from your exertion - your labor.

When rents rise to become rack-rent, the extra you pay comes out of your wages. This makes it harder to prosper and may even stop production.

People are not "willing" to pay high rents, or rack-rents. They must pay them.

If I owned the air, how much would you pay for enough to breathe?

If I owned the land, how much would you pay for enough to survive on?

If land no longer had the characteristics of a monopoly, the value of a location would be rent (the advantage given to a location by the surrounding community).

A major economic effect of full rent collection by the community would be to end rack-rent and return location values to rent.

7 February, 2011

Georgist Political Economy views production from the point of view of Labor. It is truly the economics of the individual.

We use the term Labor in conversation to mean the person - in economic discussion it is used to mean human exertion engaged in the production of Wealth. I would argue that human exertion is a manifestation of everything that is the person. How he loves or hates, whether he is industrious, lazy, brilliant, or dumb - all these affect his exertion. A person may tell us things about himself, but much more informative are his actions.

Treating Labor in this fashion is encompassing. Nothing that is part of the human being is outside our science.

To survive, Labor must produce material products - in the beginning, food clothing and shelter. He obtains these things from natural resources, to which we give the name Land. He obtains access to natural resources by paying Rent. Jumping ahead, his other major cost is the acquisition of Capital. He needs tools, a place to produce, and time. He borrows these and pays Interest. What is left is Wages.

I'm telescoping this because you probably agree, though perhaps you haven't seen it described in quite this way. Also, I have left imputation out of the discussion - that is, for example, the cost to Labor of using his own Capital.

Labor pays interest for the use of Capital because it is worthwhile. The use of Capital multiplies his ability to produce and therefore multiplies his Wages. Borrowing capital is a pretty good idea for Labor and the cost of Capital is kept down by market forces - by the action of supply and demand, which I call the price mechanism.

If Rent suffers the control of the price mechanism as do Interest and Wages, Labor is not inconvenienced by its payment to a landholder. If the community provides an advantage of $100 a day to a location - that is to say Rent - and labor pays $100 a day to a private landholder for the location, his Wages are unaffected. (We'll leave tax revenue out of it for the moment.)

He gets $100 a day from the location, and pays $100 a day in rent. It's a zero-sum situation. Once located, he can put his intelligence and many skills to work to produce a comfortable Wage on which to live well. His wages are not diminished by the payment of rent.

Unfortunately, this is not what happens. Rent is not controlled by the price mechanism. To remind you, the cost of something in the marketplace is determined by supply and demand. Prices in a free market hunt around equilibria. If the price of something is (say) $100 and the demand for it increases, so does its price. The price rises above the equilibrium. This has two effects. Producers rush their goods to market to take advantage of the higher price, while some buyers are dissuaded by the higher price. The effect of this is to return the price of the goods back to their equilibrium of $100. The price mechanism in a free market continually hunts around equilibria controlling supply and demand. It is fast and efficient and outperforms a controlled economy by a wide margin.

There is a continual demand for locations. The effect of this is to raise their prices above equilibrium (Rent). However, the price mechanism cannot produce more locations and rush them to market. When downtown Los Angeles Rents zoom astronomically, it is not possible to bring in some cheap Mohave desert land to compete and bring land costs down to equilibrium (Rent). So, costs keep going up. Indeed, the reaction of this monopoly market will be to keep pushing land costs up until they bang against a ceiling. This ceiling, I suggest, is the highest cost that can be charged while maintaining production. If landholders try to charge more, the sites will remain vacant, or underused.

To call this monopoly cost Rent seems to me to be ridiculous. Rent is the value of the advantage provided to a location by the surrounding community. A tenant in the present economy must pay much more than Rent to gain access to land.

I call this excessive cost rack-rent, a label I regard as being fully appropriate. (Any label will do. As you will recall, the label affixed to a defined concept is the least important part of definition. I prefer rack-rent an ancient term.)

Collecting Rent for the public purse has the important economic effect of placing Rents under control of the price mechanism. It does this by making unused or underused landholding too expensive to maintain. Land will come on the market in quantities. Land prices and Rents will topple until the equilibria equal Rents.

The Rent exemption advocates don't appear to believe this. They think that rack-rents will continue with the full collection of Rent. Hence, their policy to provide exemptions. I think exemptions are unnecessary. This discussion will continue.