Land as a Distinctive Factor of Production

Mason Gaffney

[A work in progress, updated June, 2004. Part 1 of 2]

A. Primary Distinctions

A-1. Land is not produced nor reproducible

A-2. Land as site is permanent and recyclable

A-3. Land supply is fixed

a. The overall planet is fixed.

b. Land is fixed within political jurisdictions.

c. Land as site is immobile in space, permanently.

d. Land is fixed in form.

e. Acquiring land must mean taking others'.

A-4. Land is immobile in space and uncontrollable in time

a. Land does not migrate.

b. Land values are marked by continuity in space

c. The services of land flow and perish with time.

d. Land is not uniform to a user or firm.

e. Land is not uniform to a city or economy

f. Land division is a highly social process.

g. Nuclei are interdependent.

h. Land is immobile among taxing jurisdictions.

A-5. Land does not turn over, but rather is recycled and is versatile

a. Land is not convertible into other land.

| b. Land is necessarily versatile.

c. Land per se is economically divisible, unlike capital.

d. Capital evinces "economies of simultaneity" in construction.

A-6. Land is not interchangeable with capital

A-7 Land rents are subject to common forces that differed from and are generally reverse to those that determine interest rates (the price of capital.

A-8. Land price guides investors and determines the character of capital, as capital substitutes for land

A-9. Land is limitational

A-10. Land value is not an economic fund

B. Major Economic Consequences

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

a. Politics guides the original distribution.

• 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.
  
• iii) The ability to bid high does not necessarily come from legitimate saving.

b. Privatization is dominated by giveaways and resultant "rent-seeking," which warps allocation.

c Inertia takes over after the original distribution, perpetuating and aggravating it.

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

B-2. Much land remains untenured

B-3. Landownership imparts superior bargaining power

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

a. Land rent does not determine interest rates.

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. | ii) Rising land prices are net income to individuals.

c. Investing in land is macro-economically sterile.

d. Public policy needs to promote capital formation but not land creation.

e. Land price is unrelated to cost of producing land.

B-5. Land rent is a taxable surplus

a. Relative elasticities.

b. The surplus is much more than usually stated.

B-6. Uniformity in taxation between land and capital is not neutral

a. Land and capital are non-interchangeable, and mutually exclusive.

b. Taxing capital is non-neutral per se.

c. It is impossible to tax capital uniformly.

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

B-7. Land values are hypersensitive to discount rates

B-8. Land markets are dominated by access to long-term credit

a. Financing purchase ranges from difficult to impossible.

b. Land purchase is not self-liquidating.

c. The corollary of high land price is high carrying cost relative to cash flow.

d. Credit barriers are barriers to equimarginal allocation of land.

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

a. Landownership accretes around existing nuclei.

b. It follows that landownership is highly concentrated.

B-10. Land markets are sticky

a. Weak seller motivation.

b. Waiting for Godot.

c. Limited competition.

d. Lags in reallocation.

e. Lack of homogeneous land.

f Lack of turnover.

g. Hoarding for vertical integration.

h. Assembly.

i. Institutional stickiness.

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

a. Expansion is zero-sum.

b. Land is a natural base for monopoly and monopsony.

c. The differentiation of land is permanent.

d. Local market power.

e. Land is the basis of cartels.

f Land puts the lock on monopoly.

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

a. Appreciation is current income.

b. Landowning yields large non-cash service flows.

c. Land income is a prior claim, not a "residual." Cf. A- 14.

d.Land income is a large share of national income.

B-13. Consuming land means preempting its time

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

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

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

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

C. Land-driven Booms and Busts

C-1. LAND VALUATION IS SUBJECTIVE

C-2. Land value is used as the basis of credit and money

C-3. Land markets are prime causes of instability

a. Land prices move in cycles of high amplitude.

b. Investors respond to high land-price by forming land-saving capital, i.e. substituting capital for land. It is useful to distinguish five forms this substitution takes (cf A-6, where these points are outlined).

• i) Land-saving capital, like high buildings.
  
• ii) Land-enhancing capital, meaning capital used to improve land for a new, higher use.
  
• iii) Land-linking capital, like canals and rails and city streets.
  
• iv) Land-capturing (rent-seeking) capital, like squatters' improvements, and canal and rail lines built to secure land grants, and dams and canals built to secure water rights.
  
• v) Rent-leading capital.

c. Land-saving capital is well above average in durability.

SUMMARY

Land as a Distinctive Factor of Production

The classical economists treated land as distinct from capital: "land, labor and capital" were the three basic "factors of production." They were mutually exclusive. They were comprehensive, including all economic agents. Each was also "limitational," meaning at least some of each was needed for all economic activity (v. A9, below)[1] They made a coherent system, like Humboldt's Cosmos, in the spirit of The Enlightenment that spawned them both.


Neo-classical economists denied the distinction and undertook to purge land from economese.

• Many of them, following John B. Clark and Frank Knight, still deny the distinction as I explain in The Corruption of Economics, a companion volume in this series.
  
• Many treat the matter by seizing on and stressing all similarities of land and capital, while ignoring all differences.
  
• Some invent gray areas that seem to fuse land and capital, present them as typical, and quickly move on.
  
• Many more simply ignore land, which has the effect of accepting the Clark-Knight verdict in practice.
  
• Others uneasily finesse and blur the issue by writing "land" in quotes, or trivializing its value, or referring vaguely to "quasi-rents" to comprehend a broad spectrum of incomes both from land and other factors.

What ever possessed the neo-classicals to leave such a mess? One needs to know something of their times and politics. J.B. Clark and E.R.A. Seligman of Columbia University were obsessed with deflecting proposals, strongly supported at the time and place they wrote, to focus taxation on land. Henry George, after all, was nearly elected Mayor of New York City in 1886 and 1897. Frank Knight, founder of The Chicago School, followed them closely. That explains why some of the points made herein may seem obvious to readers who have been spared the formal conditioning imposed on graduate students in economics. In graduate training, however, the obvious is obscured, silenced, or denied. Hundreds of books on economic theory are published with "land" absent from the index. Denial is reinforced by dominant figures using sophistical, pedantic cant, which students learn to ape to distinguish themselves from the laity and advance their careers.[2]


The dominance of "fusers" is shown by the prevalence of 2-factor models, wherein the world is divided into just labor and capital.[3] Land is melded with capital, and simply disappears as a separate category, along with its distinctive attributes. A number of economists don't buy it, but don't do anything about it - acquiescing in error by silence, indifference, passivity, or anxiety of the professional consequences. They handle the question by "going into denial," as it were, resolving a vexing issue by pretending it isn't there. Anything else spoils the web of interpretation through which their art seeks to make human experience intelligible.[4] Truth will not be made manifest by donning blinders hedging, especially against such motivated forces as have an interest in hiding unearned wealth behind the skirts of capital.

The market exchange of capital for land causes an elementary failure in the minds of many. Land and capital each have their prices and may be bought and sold for money. Each alike is part of an individual's assets, colloquially called his "capital". Each is a store of value to the individual. What is true of each individual must be true for all together, is the thinking: it is the "fallacy of composition." We will see herein that society cannot turn land into capital (A-6), and land is not a store of value for society (A-10).

The discipline has not totally eliminated land, but marginalized it. The discipline has not totally terminated land: it is too subtle for outright skullduggery, preferring equivocation and confusion. Rather, it has marginalized it. There is a subdiscipline called "Land Economics," and a journal of that name. There are journals of Agricultural Economics, Urban Economics, Regional Science, Environmental Economics, Natural Resources, and more. There are also whole disciplines of Geography, Economic Geography, Military Science, Biogeography, Geology, Geometry, Surveying, Astronomy, Theology, Ecology, Oceanography, Meteorology, Soils, Physiography, Topography, and Hydrology, all dealing with The Earth and Nature and Creation as definable topics distinct from man's works.

The subdisciplines are kept away from the "core" and "mainstream" of economic thinking by compartmentalization and colonialization. Patronizing "land economics" as a colonial discipline keeps potentially contagious movements within the empire, where they can absorb critical tendencies under watchful control, while yet remaining safely remote, in the outskirts of the system. Orthodoxy flows out from the core, communicated via mandatory "core courses." Land economics is banished from the "commanding heights" of money and banking, macropolicy, and required "basic" courses in methodology and micro theory.

Colonial life is safe and easy, if dull and unfulfilling, but once labeled "colonial" one is supposed to remain in the assigned cage. One who attempts integration is "overambitious," and "spread too thin". Colonials are not supposed to relate land economics to unemployment, inflation, financial collapse, deficit finance, and such core topics. They become unwitting co-conspirators in marginalizing their subject.

Micro theory is the inmost citadel of holy writ, where "the economic way of thinking" is inculcated. It is required of all economics students before they venture into real issues. It becomes their shibboleth, their lingua franca, and shapes their worldview. Within common micro theory, to the extent it relates to real life at all, the technique has been first to relegate production economics to a minor role: "price theory" comes first. Production economics deals with the optimal combination of inputs in production, and how this relates to their relative costs. That should lead right into factoral distribution, but this aspect is soft-pedaled or omitted entirely. This omission alone is a fatal fault, considering that the forces determining land rents vary inversely with those determining rates of recturn on capital (cf. A-7 below).

Within production economics, "variable proportions" with "factor symmetry" replaces diminishing returns. The parcel of land disappears as a unit of analysis, replaced by "the firm," a disembodied spirit that combines resources optimally, treating all alike as variable "in the long run." In the "short run," land is subsumed in "fixed costs"; rising demand that raises rents is just "imputed away" silently and lumped with other elements of "fixed cost." If that sounds muddled, it is because what it describes is muddled.'

Common micro theory finesses Time. It deals with economic relations as though they occurred at a point in time (and space as well); as though they were relations of coexistence, rather than a cavalcade of events in sequence. Sometimes two points are allowed (short run and long). Thus micro theory can ignore the birth of capital, its growth, maturity, senescence, death, burial, and replacement, vital elements of its difference from land. Time, and relations of sequence, are hived off to the far satellite of "finance," usually not even taught in departments of economics. Time is also referred to under "history of economic thought," as an obsession of some 19th century Austrians who wrote quaintly of "roundabout" (time-using) methods of production.[5] Relations of sequence are found in macro, but not firmly integrated with microtheory, which is the enduring core of the discipline. Microtheory still deals with relations of coexistence in time, and space as well. As A. A. Milne once wrote, "It isn't really anywhere, it's somewhere else instead." Of neoclassical theory we may add, "It isn't really anytime, it's some other time instead."[6]


A compulsive trendiness grips theorists, who produce new words and concepts monthly, raising insurmountable barriers of communication. These seal off the profession not just from the outside world, not just from reality, but from itself, as it subdivides economic thought within elaborate mazes behind ever thicker walls of new argot. Jesuits quibbling with Jansenists in 18th Century France were never more arcane nor tiresome than most economic theorists today. These elaborate structures rise, however, upon the spaceless, timeless basis of micro theory inherited from J.B. Clark and Frank Knight. They can be no better than their foundations. Indeed, that is what makes them so tiresome.

All that is confusing for students and others. Land does have distinctive qualities for economic analysis and policy. This essay gives 10 primary reasons why land is distinct from capital (and of course from mankind itself) as an economic input. Then it gives 18 important economic consequences thereof, and their policy implications. Making land markets, land policy, and land taxation work well for the general welfare is a major challenge for economists and statesmen. They have neglected it too long by crediting and following the peculiar neo-classical sophisms that obscure or deny all distinctions between land and capital.

A. Primary Distinctions

A-1. Land is not produced nor reproducible

Land is not produced, it was created. It is the world, the planet from which man evolved, with the sun that energizes it and the orbit that tempers it. Land is a free gift, variously expressed in different philosophies as Spaceship Earth, the Big Blue Marble, God's Gift, Creation, Gaia, The Promised Land, or nature. Mankind did not create The Earth with its space and resources, nor can we add to them. We can only acquire them, often by fighting, or rent-seeking, or in other counterproductive ways. Man at best improves and develops capacities inherent in the free gift. It is disappointing, and should alert us and make us suspicious, that economic analysis would ever purge out this paramount, self-evident truth.

"Land" in economics means all natural resources and agents, with their sites (locations and extensions in space). Land is not just the matter occupying space: it is space. It includes many things not colloquially called land, such as

• water and the beds under it,
• the radio spectrum,
• docks,
• rights of way,
• take-off/landing time slots for aircraft,
• aquifers,
• ambient air (the right to breathe it and the license to pollute),
• "air rights" to strata in the third dimension of cities,
• falling water,
• wild fish, game, and vegetation,
• natural scenery,
• weather,
• the environment,
• the ecology,
• the natural gene pool, etc.
• Any franchise, license or privilege giving territorial rights is a species of easement over land.
  
  • Your driver's license is a right to use land;
  • Red lights remind us of the critical value of space at central locations, since two objects cannot occupy the same space at the same time.
  • It is worth a lot to have the right-of-way, as railroads do.

Economic land excludes many things, too, that are colloquially called land. It excludes land-fill, for example, by which many cities are extended into shallow waters. The site and seabed are properly land; the land-fill is an improvement. There is no "made land" in the economic sense: it is reallocated from other uses. Expanding cities take farmland from producing food and fiber, much of it for the expanding city itself. Filled land in shallow water near cities is taken away from anglers and sailors and viewers and ecologists, who now routinely organize to prevent it being "made" away with. Drained and filled wetlands are taken away from endangered species, as well as from their primal role as filters protecting coastal waters from river trash and pollutants. Thanks to the myopia and dereliction of economists, it has taken militant environmentalists to carry home this truth, developing in their struggle to be heard and understood a deep skepticism of economists and their "way of thinking." Some economists and environmentalists are now coming to terms with each other, after decades of mutual shunning. Too many modern economists, however, still use their "way of thinking" to seal out important new evidence that doesn't fit the model.

Capital (K) is that which has been produced but not yet used up. Capital is formed by human thrift, forbearance, investment and production. Only after mankind forms and makes capital does it bear much likeness to land, in that they coexist. Ordinary 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 one of the prime differences between land and capital. The life of capital, like that of people, is marked by major sacraments of birth, growth, aging and death - all missing from micro theory. Economic life is a cavalcade in which the birth and death of capital are dated events. Micro deals mainly with how existing resources are allocated at a moment in time, not how they originate, grow, flourish, reproduce, age, die, and decompose.

Capital occupies space; land is space. In common micro theory, resources and markets come together at a point not just in time but in space. Again, it excludes from its purview one of the prime qualities of land.[6]


For the reasons given, alone, land and capital are mutually exclusive. There are, however, nine more, which follow.

A-2. Land as site is permanent and recyclable

Land as "site" (location plus extension) does not normally wear out, depreciate, spoil, obsolesce, nor get used up by human activities incident to occupancy and production. In contrast, capital depreciates from time and use, routinely and by nature. After being formed, it must be conserved from entropy by continual maintenance, repair, remodeling, safeguarding against theft and fire, and so on.[7] Like our own bodies, it returns to dust; land is the dust to which it returns. Inventories are depleted; moving parts wear out; fixed capital depreciates with use and time.


Land normally does not depreciate as a function of time. Most attributes of land also withstand use and abuse. Most land is, rather, expected to appreciate in real value in the long run. Values go in cycles, but the secular history is upwards as population, capital, and demands all grow while land remains fixed. Capital has a period of formation during which it accretes value by storing up other inputs and changing physical form, but that is a phase. Once formed, almost all capital fails with time.

Perhaps the most durable capital is intellectual, like the writings of Plato. These, however, do not endure generations without the continual human effort and expense of education. As schools starve and libraries close, it is sadly certain that much will be lost. Under any conditions much is twisted in transmission, like classical economics itself.

Capital, however durable, also obsolesces because it is subject to continual competition from streams of new products. Intellectual capital, however classic, is subject to endless competition from floods of new ideas and discoveries. Land does not obsolesce from this cause: there is no new land, let alone modem, state-of-the-art land. Both land and capital are subject to demand-obsolescence from changes in tastes and fashions, but overall the taste for land as a consumer good rises as incomes and wealth grow. The writer has documented elsewhere how the land share of residential real estate value rises sharply with its total value.[8] The land part of residential real estate is a "superior good"; the building part is not.


It follows that the demand for land arises over time with incomes, but faster than incomes. For example the soaring demand for golf has produced 150 golf courses in one California county (Riverside) alone, preempting a good bit of the usable land and a huge share of this natural desert's limited water resources. The western quarter of Massachusetts, the Berkshires, with adjoining parts of Connecticut, New York, and Vermont, has become one vast country estate for suburban New Yorkers and retirees, and is priced high above its farm value. Ski resorts, hunting clubs, yacht harbors, spas, beach resorts, and such uses increasingly outbid mere utilitarian uses for prime lands. There is also a high and rising technical multiplier of demand for land to complement modem consumer capital. For example, the parking demands alone of 200 million private autos in the U.S.A. preempt an area as large as Maryland and Delaware combined. Unlike most of Maryland and Delaware, the parking lots are mostly on high-valued land in cities. Soaring demands and reuse values are thus the norm in an affluent society.

What can it mean to "consume" land, when it does not get used up? It can only mean to occupy or preempt a time-slot of space. That has the most profound implications for the meaning of "consumption" in economic thinking, and "consumer taxation" in fiscal policy. Economists have neglected and papered over these matters almost completely. These are pursued in B-13 below.

Some attributes of some lands do deteriorate from some uses or abuses. Extractive resources call for special analysis, which the writer has attempted elsewhere.[9] To avoid lengthy repetition from previous publications, the word "land" herein refers to the permanent qualities of land, exemplified by (but not limited to) site. Remember, land is not just matter, it is space itself.[10] It is not unusual for land first to be mined, then used for dumping wastes, then sealed over for urban use. I myself have lived comfortably over an old munitions dump on Lockehaven Drive, Victoria, B.C. Not far away is Butchart Gardens, a world-renowned beauty spot, fashioned in a once-ugly gash left by a stone quarry.


Land is reusable. All the land we have is second-hand, most of it previously-owned. Our descendants, in turn, will have nothing but our hand-me-downs. As there is never any new supply, the old is recycled periodically, and will be in perpetuity, without changing form or location. Melded briefly with fixed buildings, land survives them to go one more round of use. Even while melded with capital, land is fit for another use at any time, unlike the capital on it. Land retains a practicable, measurable, meaningful opportunity cost. Land value in cities may be defined as "what is left after a good fire"; arsonists take that quite literally. In Beverly Hills, California, "tear-downs" are routine as taste-obsolescence races through fashionable neighborhoods where the land outvalues even the elegant buildings. These are dated after thirty years.

The opportunity cost of capital is fleeting. Capital loses most of it the moment it is committed to a specific form, whose physical alternative use is often only as scrap. Land's "opportunity cost" is real and viable at all times. The scrap value of capital is often zero or negative (radioactive waste supplying an extreme example).

Land may be afflicted with such "negative capital," the harmful waste from prior usage. An example is the spent carcass of an old building needing costly demolition. Some would class that spent carcass as a subtraction from the site value, but "negative capital" makes more sense, as may be inferred by considering the relations between a landlord and a tenant in a perfect market. The lease holds the tenant liable for damages he does and wastes he leaves; the prudent landlord requires of the tenant a deposit, or in larger cases a bond, to assure performance. Both acknowledge that damage done by use is imputed to the user, not to the land.[11]


Too often, from institutional or market or human failure, the land is left damaged, with no recourse against those responsible. Then, indeed, the damage becomes part of the land, just as some of the good relics of history may as well be considered part of the land. Toxic wastes, and endemic parasites imported with previous crops or trees, become mixed into the dirt. We do not trivialize nor quibble over what to call such damage: it happens, and it impairs the reuse value of land. In such cases the site is less valuable, but still permanent and recyclable. Such cases are, fortunately, still more the exception than the rule. They are at most a minor qualification to the major points made here.

Physical abuse of land is less a problem, actually, than the fall of value that results from social decay. Much of land value is a social product. When a society sickens, declines, and self-destructs, as we know may happen, it lowers ground rents, which mirror social progress and decay. We cannot surely forecast that our own society will not self-destruct, as parts of cities already have. However, until it does, land will outlast capital economically. Even when it does, landownership may remain the last bastion, as happened in the feudal system. Even if barbarians overrun us, it is the land they will take: little else will remain.


A-3. Land supply is fixed

Being both unreproducible and permanent, land remains fixed.[12] Both the overall quantity and the special qualities of specific lands remain fixed. Capital changes its form and location with each turnover, while land remains the same. The Tyler Galleria neighborhood in Riverside, California, makes an example. In the last fifteen years over half the buildings have been replaced or heavily remodeled. Streets have been repaved and widened; utilities enhanced. Inventories have turned over hundreds of times; cars in the parking lots have come and gone thousands of times. Through it all, the land is the same.


The fixity of land has several aspects.

a. The overall planet is fixed. Even the planet may change, but "fixed" here means "given" or "exogenous" or "outside individual control," not necessarily static. Cosmic and tectonic and climatic changes are given, so far as man is concerned. Changes caused by mankind collectively are given so far as individual landowners are concerned.

b. Land is fixed within political jurisdictions. Political jurisdictions are defined as areas of land. Capital and labor cross political boundary lines; land stays put. An "open economy" is open to money and goods, to capital and labor, not to land. For tax consequences, cf. A-4 and B-5 below.

c. Land as site is immobile in space, permanently.[13] Much capital, on the other hand, is physically mobile by wheel, hoof, wing or boat. California calls this "unsecured" property, and France calls it "meubles ", as distinct from the other kind which is "secured" and "immeuble."[14] Most American Jurisdictions use the less expressive "personal" and "real" property for the same distinction.


In Englsih the etymology may reveal the king's underlying ownership: "real estate" probably springs from rotal estate, "real either being contracted from "regal" or borrowed from the French and Spanish real, royal. Spanish law does recognize "regalian" ownership of subsurface minerals. (In Latin American history, this took the form of a 20% severance tax.)

Our word "realize," meaning convert to money, likely derives from the fact that money was issued by kings and bore their images. The Spanish real was a silver coin of wide currency. Spanish coin was the western world's hard money for four centuries.

Secured or "real" capital is capital affixed to land. The physical carcass of most buildings is rooted to the spot, leading some to allege buildings are as fixed in location as land. That would be specious, economically. The capital locked up in the carcasses of buildings is normally recovered, as they depreciate, in Capital Consumption Allowances (CCAs) which may be reinvested anywhere.

"Basic" micro economic theory, as ordinarily ordained today, is constructed so as to paper over this basic difference of land and capital. In its "short run" land and capital are both fixed. In its "long run" both are equally variable to "the firm," the disembodied spirit used as its unit of analysis, existing at a point in time and space. Thus, one can specialize for a lifetime in "basic micro" while remaining unaware that capital, over time, changes its form and location as it turns over, unlike land. Land yields no such mobile funds as CCAS. It does not depreciate, and is priced accordingly higher, so its income is only enough to yield a return on the price paid, not a return of it. (See A-5, below)

Land is "mobile" only in the limited sense that its use may change. Some micro economists would have this sort of "mobility" equate land to capital. See A-5,a, below.

d. Land is fixed in form. Capital, in contrast, is Protean, assuming one form after another. Capital is also fungible with each turnover. Capital Consumption Allowances in money join the common worldwide pool of disposable capital. Money itself is not capital, but is generalized command over a share of the flow of current production. Thus, capital loses its specific identity with each turnover.

e. Acquiring land must mean taking others'. No one can get more land without others keeping less. One can acquire more capital by forming it through saving and investing. One can consume more by working more, while others work no less. Land is different: it is the most common basis of market power, therefore (cf. B-11, below).

A-4. Land is immobile in space and uncontrollable in time

a. Land does not migrate. When demand grows for land in a specific area or neighborhood, land cannot immigrate to meet the higher demand. It is true that land elsewhere can be converted to the specific land use that is demanded. Some micro theorists argue that this makes land as "mobile" as anything else, equating land and capital. It dovetails with and reinforces their paradigm centered on "the firm," a unit that can add unlimited inputs of all kinds in the long run, and among which competition drives all profits to zero. This rationalization overlooks the hoary adage of real estate: "value depends on three factors, location, location, and location." What happens then is not that supply rises to meet higher demand, but ground rent rises.

Robert Triffin wrote that "excess returns are either competed away, or imputed away." Excess returns to capital are the ones that get competed away; excess returns to land get imputed away. Rents and land prices rise where demand is focused. Interest rates, the cost of capital, do not rise: capital abhors a vacuum, and rushes in to bring returns back down to the common worldwide level. If anything, interest rates are lower in central cities because of the more perfect markets that develop there. Intensive development and use of the third dimension at the hub of a city makes it even more attractive, through synergy (conglomerate increasing returns to scale), raising rents still more.

b. Land values are marked by continuity in space. The price of land is closely related to that of adjoining land, for they are usually near substitutes. Richard Hurd, pioneer author of the classic Principles of City Land Values (1903), posited this rule, noting the continuity is both concentric and axial. It is therefore possible to map land values as one would map elevations, drawing contour lines of equal unit value.

c. The services of land flow and perish with time. Land is "immobile in time" in the sense that its services flow steadily with time. They cannot be stored and shifted forward to meet anticipated higher future demand, like stored goods. They cannot be bunched, like military tanks for an attack. One cannot reach into the future and marshal them for present needs or emergencies. They are never "on tap," for drawing down at will; neither may they be set aside for future use. Rather they flow down the river and out the gates of time to sink forever into the dead past.

Land services may be and are used to produce capital, and the capital is stored up. An example is land used for growing timber, or raising seedlings to bearing age. Another example is flowing water stored in a reservoir. This does not convert land into capital, however, any more than it converts labor into capital. Stored-up labor and land-service are capital: that is what capital is, by definition.[15] Nature's services per se, however, come in a flow like time itself, unbidden and uncontrollable. Mankind cannot advance nor retard its services at will.


Considering the improvident nature of mankind that is perhaps a good thing, but good or bad, it is so. Many polities have hit upon this trait of land to stabilize society, by dividing up land and making it unalienable. The Roman Demeter, for example, was goddess of farming, family, and social order, which the early Roman republicans viewed as a package.[16] Thus they created a society of small citizen-proprietors who could never squander their major asset, and who could not sell to foreigners.

Land titles serve as "stores of value" for individual owners. By the common fallacy of composition, plus some confusion, that makes it all too easy for laymen, and economists too, to think of land as a store of social value. The individual can tap this store, however, only by selling it to another. Neither of them can advance or retard the flow of services at will.

Usually the given flow is steady or seasonal, but not always or necessarily. Seasons change, climates change, environments change, blights and pestilences come and go. The essence of land service flow is not steadiness, but exogeneity. Alfred Marshall defined the "public value of land" as the product of three factors exogenous to the private owner: nature, public services, and spillovers from the use of nearby private land. This "neoclassical" was classically right on this point (great economists seldom fit snugly into tight boxes).

d. Land is not uniform to a user or firm. When a firm adds land to its operation, the added land is normally farther from the firm's nucleus and not, therefore, homogeneous. The added land is marginal to the firm in location, not just in quantity. The marginal location means that more internal transportation cost is required to integrate the added land with the operation. That is a prime diseconomy of scale, limiting the optimal area of producing units. As a firm expands it takes land from the margins of neighboring firms. As Firm A continues to expand, the zone of acquisition moves farther from A's nucleus, but closer to that of B, its neighbor. As the zone advances, the contested land becomes of higher value to B, and lower value to A. Again, this is a matter both of pure quantity and specific location. Military Science would produce few winners if it aped Economics and ignored such facts.

It is different when a growing firm adds labor and capital to its operation. These are drawn from the margins of other operations, but they are marginal only in quantity, not location. They are homogenous units, and may be added to the core of the growing operation. That continues to be so, however much Firm A grows, or B shrinks. This is because labor and capital migrate, and their supplies are a "pool." No one neighbor is singled out for raiding; there is no locational factor.

This locational factor qualifies the idea of "factor symmetry," as developed by Clark and Wicksteed, and expressed in the replacement of "diminishing returns" by "variable proportions" in economic analysis. It is impossible to add "homogeneous" land to an operation: each unit has a unique location, and added land is normally farther from the nucleus.

This consideration, taken alone, would make landholdings tend toward uniformity, to minimize internal transport costs. In fact, however, landholdings are less uniform than other measures of firm size, like labor force, capital improvements, sales, and value-added. These facts are consistent with an hypothesis that the acquisition of land as a store of value, dominated by financial forces tending toward concentration, interferes with efficiency in land markets. This hypothesis is further considered in B-11.

Added land, besides being farther from a nucleus, may be farther from a street interface. In retailing this is extremely weighty. In retailing this is extremely weighty - cf. the rule of 4-3-2-1. Land added to water front parcels may be far from the shore, and so on.

A rule of thumb when valuing retail sites. Divide the lot in quarters, starting from the front. The first quarter has 40% of the value, then 30%, 20%, and 10%.

e. Land is not uniform to a city or economy A city that grows in capital and people generally enjoys a long stage of increasing returns to the composite urban economy, even though each atomistic site is improved in the stage of decreasing returns to capital and people. This antinomy is due to synergy. Cities exist to bring people and capital together in space. People attract more people; capital attracts more capital; people and capital attract each other.

Adding land to a city, on the other hand, often results in diminishing and even negative returns to the composite city. Cities are already full of holes. Adding more land, especially in the sprawled manner of modern American cities, adds to the cost of tying the pieces together. There is an enormous literature on the wastes of sprawl. It may be summarized in two points.

• First, it foils the very purpose of cities, by keeping people and capital apart, and aborting synergies among them.
  
• Second, it raises the cost of preserving such synergies as survive.

f. Land division is a highly social process.

• i) Land division entails "packing." One individual parcel does not expand or contract without impacting the whole system. Parcels have common boundaries and must be packed together so that they all fit. Many costs like fencing and roads and utilities are shared along the common boundaries. These costs vary with the length of the boundaries.
  
• ii) Capital and labor come in "nuclei." Each parcel has its nucleus, as, for example, a farm centers on its farmstead.[17] The nucleus is the indivisible core of labor/capital applied to the land. Land division entails more nuclei, hence greater intensity of land use, for whatever purpose.

"Nucleus" here is a proxy for labor/capital, although one nucleus is not a fixed quantity of labor/capital. Generally the nucleus shrinks as the acreage shrinks, but in lesser proportion, so intensity of land use rises.

g. Nuclei are interdependent. In finding the optimal resultant of these opposing forces we are faced with more than a standard example of diminishing returns. One could perceive land division as simply a matter of applying more people and capital to a given area of land. The more intensive application to each acre justifies itself up to a point by added yields from each acre; beyond that the added yields do not compensate for the added costs.

But there is more here than a simple matter of quantities and proportions of inputs. There is also a distance factor. The more parcels we add the closer are their nuclei, and the less is the cost of linking them along the common lines. The cost per acre is, to be sure, higher: that is inherent in adding more labor and capital to a given amount of land. But the linkage cost per parcel drops as we add nuclei by dividing land into more parcels.

There is an asymmetry here that has been obscured in the evolution of marginal productivity theory, with its effort to show that the relationships among all the classical factors of production are "symmetrical," so that diminishing returns is simply variable proportions. Land is not symmetrical with labor/capital. When you add nuclei of labor/capital to land, they get packed closer together. But when you add land to fixed labor and capital, the units all get farther apart -- the land units as well as the nuclei of labor/capital.

Such distancing of the active nuclei of economic life requires more capital and land devoted to the linkages among them - "urban sprawl" is the familiar term. Sclerosis is the corresponding medical condition: an overgrowth and hardening of connective tissues at the expense of the active tissues they link. It is pathological for societies, as it is for organisms.

h. Land is immobile among taxing jurisdictions. Tax jurisdictions are specific areas of land: they are defined that way. Land cannot escape from taxation, therefore (cf. A-3). Further, it follows that all purely local taxes are shifted to land, whatever the nominal base of the tax (cf. B-5). If the application of labor and capital to land yields no surplus or rent, there is no tax base: any attempt to tax the labor and capital must simply drive them away, unless the use of the taxes itself creates rent. This is the "Physiocratic law of tax incidence" [18] Likewise, purely local services add to land rents.

A-5. Land does not turn over, but rather is recycled and is versatile

a. Land is not convertible into other land. Each unit of land is permanently unique. Capital, on the other hand, is a homogeneous "pool" over time: as each unit degrades and yields back its substance, the owner may reinvest the Capital Consumption Allowances in anything. Thus, capital is fungible: one specific item of capital is universally convertible into any other. Land is not at all fungible: no specific unit of land is convertible into any other.

J.B. Clark, as is well known, tried to wipe out this distinction, which brought him into debate with Boehm-Bawerk over whether capital has a "period of production". Frank Knight, following Clark, renewed the debate with Friedrich von Hayek. The intent of both Clark and Knight was to shelter land behind the skirts of capital, to counter a popular movement for taxing land more and capital less. Students are still required to study these dreary, mystical exchanges, which seem to have no other purpose.

The rate of turnover of capital may vary, and does, over a wide range, from once a day for restaurant fresh vegetables to once a century for slow growth timber. Thus, the "valence" with which capital combines with labor is highly variable. The land/labor valence is not fixed, but it contains no such extreme factor as this.

b. Land is necessarily versatile. Capital is made to order for specific needs. There are degrees of specialization, but all capital is somewhat specialized: buildings cannot turn into canned goods or forklifts. Existing capital goods are committed to a specific form, and so lose most of their opportunity cost. Capital goods also suffer from various kinds of obsolescence, including, when affixed to land, locational obsolescence.

Land must serve all of man's needs of the day, and perpetual streams, waves, and eddies of new fads and demands, with no physical change. Even land taken from the Indians, as they keep reminding us, had a previous use. Even land that is allegedly "made" by filling in underwater sites is taken from navigation, fish, recreation, wildlife, and other previous uses.

New demands and discoveries bring out new virtues in old land but it is man that has changed, not land. The resources were always there waiting. Land rarely obsolesces in the sense that specific capital goods do. Land's opportunity cost remains a viable option, because the only source of land for new uses today, as for ages past, is to take it from its previous use. We tear down old buildings mainly to salvage and recycle the land, not the capital in the buildings: this turns into scrap and junk that is usually worth less than the cost of hauling it away. The tribe of economists, whose inclusions and omissions are so often a puzzle, fill their papers with references to "opportunity cost" and "alternative uses," but hardly ever mention that capital goods, especially buildings, have little or none. An honorable exception was Alfred Marshall, but since his generation has passed one finds abundant lip service, but fewer and fewer references to what Marshall actually said (Principles of Economics, (New York: The Macmillan Company, orig. 1890; 8th Ed., 1920; 7th Printing, 1959, 1948 (sic), p.441)) the concept of opportunity cost should apply mainly to land.

Here we meet an apparent contradiction it is important to sort out, lest we be led astray by J.B. Clark's confusing writings on capital. As specific capital goods age they yield "Capital Consumption Allowances" (CCAs) which the owner can then reinvest in anything. That makes the pool of capital totally versatile over time, as capital turns over. It is specific concrete capital goods that lack much opportunity cost and versatility.

Land never turns over the way capital does, and so lacks the extreme and Protean versatility of the pool of capital in the long run. It is before capital turns over through its CCAs that land is more versatile than capital. This is relevant to tax matters because the assessor can not value an existing building by its opportunity cost, but he or she can always value land that way.

c. Land per se is economically divisible, unlike capital. Since land does not have to be produced, it can be divided into parcels as small as you please. Capital is economically indivisible, an economist's word which does not mean quite what it appears to. One can produce very small trucks or ships or buildings, but the cost per unit of useful capacity rises as they get smaller: that is "Indivisibility." Its converse is economy of scale.

Economies of scale are inherent attributes of capital and labor, not land. They spring from using large units of capital; or large teams of workers with specialized members. For this large lands are required, but the scale economies are not in the land. It is usually a social diseconomy to acquire large lands because they impinge on others and push them out of the way. Thus a large truck requires more street space which may require widening streets which take land from the buildings between the streets. Large buildings require either land assembly, or prior withholding of land over long periods, or going to bad locations on cheap land. All of these are costly.

In subdividing land into small parcels there are, it is true, extra costs, but the cost per lot falls. Of course the cost per square foot rises, but the cost per dollar of value created generally also falls, which is why it is done. Apartments, condominia, strata titles and time-sharing represent extreme subdivision without increasing cost.

Those who require much land normally have limited choice of locations: they must go where land may be had in large pieces. It is either that, or buy it already assembled by others. That is not so true of those who need large labor or capital inputs.

d. Capital evinces "economies of simultaneity" in construction. Capital, unlike land, has to be built. Normally capital will retain through I life its original scale, and other basic characteristics, because it is so costly to add-on after construction. Buildings are adapted to particular sites when built, and are seldom raised or lowered after construction. (Capital in its making has economies both of scale, and "simultaneity".)

A-6. Land is not interchangeable with capital

Land is not convertible into capital, nor vice versa. Exchange of land for capital has misled many into equating them, but only through inadvertence and the fallacy of composition. Exchange is not interchange: exchange does not change the quantity of either land or capital. Capital is convertible into any other form of capital each time it turns over, by using Capital Consumption Allowances, the proceedings of turnover, to hire people actually to produce new capital. Capital may also be disinvested and consumed, or augmented by new saving and investment. None of those is true of land.

The fact above seems simple when laid out overtly, yet economists overlook it in framing tax policy. Nonconvertibility gives a new meaning to the old goal of "uniformity" in taxation. It belies the notion that uniformity makes for a "level playing field," or neutrality in taxation. Uniformity is desirable to avoid "excise tax" effects, or tax-induced misallocation of resources; but those worthy ends do not require uniformity as between land and capital. The Federal tax "reform" of 1986 was informed by the spirit of uniformity, to great applause but with damaging results. Effective rates were raised on new investing (by lengthening tax lives), while basic tax rates (which would catch land income) were cut sharply. It is probably no accident that a recession soon followed.

It is doubtful if uniformity within each class leads to neutrality, either. Uniformity among different land uses seems desirable, yes: if taxes vary with the use to which land is put, they bias the owner against the use more heavily taxed. However, what does that say about taxes on capital? If the tax on a parcel of real estate, including land and buildings, varies with use, it biases the owner against the use more heavily taxed. A uniform tax on buildings is a tax that varies with the use to which land parcels are put. Once we assume, or deduce, or observe, or otherwise conclude that taxes on buildings are shifted to land, then a uniform ad valorem tax on buildings is a tax that varies with the use to which land is put. It has "excise tax effects": it makes owners favor smaller, older buildings against larger, newer ones. Cf. B-6.


A-7. Land rents are subject to common forces that differed from and are generally reverse to those that determine interest rates (the price of capital).

Interest rates around the world rise and fall in sympathy. They are subject to common, interconnecting forces of supply and demand, transmitted swiftly even in past centuries, and today instantaneously.

Land rents, too, rise and fall together in response to common forces. However, the forces are different for land rents than for interest rates, so they do not vary in sympathy. Even though the lands are not mutually convertible, they are subject to common forces, the greatest of which is the interest rate itself. Capital and land are rivals for the same pie, so usually their returns vary inversely. Ground rent equals operating cash flow less interest on the cost of building, and less building depreciation. A rise of interest rates lowers ground rents.

It is hard to see how any forecast of the results of economic policy, or any forecast for investment purposes, could have any value without keeping focused on this distinction. Sometimes it is handled by distinguishing old" from "new" assets or issues. Yet, in general, neoclassical doctrine tells us to meld land and capital in economic thinking of all kinds.

(See self-quizzes on HG for more material.)


A-8. Land price guides investors and determines the character of capital, as capital substitutes for land

High land price guides investors to prefer kinds of capital that substitute for land. Although capital cannot be converted into land, it can substitute for land, and does so when rents and land prices are high. John Stuart Mill long ago pointed out that the structure and character of capital is determined by the level of rents and wages.[19] Such substitution is an integral part of the equilibrating function of markets; the human race could never have attained its present numbers and density without it. High wages evoke labor-saving capital; high rents evoke land-saving capital. It is useful to carry this farther, and recognize five kinds of substitutive capital evoked by high rents and land prices:

a. Land-saving capital, like high buildings.

b. Land-enhancing capital, meaning capital used to improve land for new, higher use.

c. Land-linking capital, like canals and rails and city streets.

d. Land-capturing (rent-seeking) capital, like squatters' improvements, and canal and rail lines built to secure land grants, and dams and canals built to secure water rights.

e. Rent-leading capital.

These are defined and discussed in Section C-3.

2004: These are defined and discussed in B-17, infra


To understand the forces shaping capital investment, one must recognize the difference of land and capital. High land prices evoke substitution of capital for land, shaping the capital stock in particular ways. Viewed positively, this is a central part of economic equilibration, tempering land scarcity. Viewed negatively, it has led historically to boom and bust cycles (cf C-3).

2004: B-17


A-9. Land is limitational

As suggested in the Introduction, land and capital are mutually exclusive. Each is also limitational, meaning all human activity requires at least some of each.

Land is indispensable to life, hence to economic activity. The same is generally true of labor and capital, but less "absolutely". Land can exist perfectly well without labor or capital, and support timber and wildlife, but labor and capital cannot exist at all without at least some land, and often a great deal of land. Substitution is limited. It will not do just to have 57 varieties of labor, or of capital. There must be at least some land. Remember, land includes space itself, and a time-slot in it. It includes air and water, the environment and the ecology and all original matter itself. Without land there is nothing.[20] Coupling this with the non-reproduceability of land, and its fixity, land is distinctive.


"Homelessness," a modem plague, is essentially landlessness. A popular ditty from the 1930s includes the catchy line, "If you can't pay the rent, you can live in a tent," but you can't do even that without a campsite. Perhaps this is why modern economists have so little to say about homelessness. Joblessness they have dismissed as part of the vital economic function of "job-seeking," with which they have persuaded at least themselves. The next logical step is that the person sleeping in the doorway is not really homeless, but just engaged in the vital market function of "home-seeking". Rather than seem totally absurd they are simply silent, except to stress the "exclusionary principle" of private property as the bedrock of their system, and their system as a panacea.

In this they are out of step with general thinking. In France, at least, polls have shown for several years the two most respected and popular figures are the Abb Pierre, who crusades for the homeless, and Jacques Cousteau the environmentalist, who also preaches on the folly of ignoring the limitational nature of land.

There is scope for massive substitution of land for labor and capital, and labor and capital for land. That is, the proportions in which we combine the factors are variable. This substitution cannot, however, be carried so far as to dispense with land altogether: this is the meaning of limitational.[21] Piling more capital on the same land is limited by diminishing returns.


It has further been advanced that micro-chips and such use so little land that land is irrelevant. This overlooks that these items are made and assembled and used in plants that spread out and produce toxic wastes, by people who arrive in autos riding over rights-of-way from homes on residential lots. Land prices in Silicon Valley are so high, and space so tight, that plants long since began moving in search of cheaper land in northern Sonoma County, Sacramento County, etc.

Therefore the three factors are always found working in combination, and much of economic theory used to deal with how they are combined. Some of it still does; the rest floats in outer space, perhaps communing with the ghost of Plato.


A-10. Land value is not an economic fund

Economists teach that all economic values are either funds or flows. It is a seductive division, and often useful, but too simple by far. Land value is neither, but a third kind of value, sui generis. Mankind cannot add to it, nor draw from it as from a true fund. Individuals can and do, by exchange. Even nations can, by selling to aliens. Thanks to the fallacy of composition that lets us forget that these are merely intermediate transactions which collectively accomplish nothing. In famine, or war, or capital shortage, society cannot live on land values. These are not accumulations of stores, but merely the present value of anticipated future service flows which cannot be hastened.

Further divisions are distinctive too, in other contexts. Exhaustible resources (excluded from this discussion) could be called "natural funds." Fixed capital, slowly depreciating with time, is a "flowing fund." Soils have additional components. But basic permanent location value, our present focus, is in no way an economic "fund."

NOTES

1. Land is absolutely limitational. Capital is nearly so in practice: we need not dwell on rare cases to the contrary.
   
2. Careers both inside and outside academia are much influenced by "deep lobbying," as described by William Greider, 1992, Who Shall Tell the People?, pp. 42-59. "Deep lobbying" is targeting public opinion several years in the future, by building allies in think tanks, academia, the media, and select activist groups. Greider gives as an example the effort of polluting interests to undo the Superfund law. They chose The Conservation Foundation, engineering the selection of William. K. Reilly as environmental czar. Greider emphasizes the role of economists, et al., as hired guns. The eagerness of many college professors and administrators to get grants at any price must be experienced to be believed, but I can attest from personal observation that it drives much of the profession and its attitudes.
   
3. So help me, in 1993 1 saw and heard a one-factor model presented, in all solemnity. Labor was the one factor. Other economists attending saw nothing wrong: they gravely admired the model's "elegance."
   
4. Thanks to Wm. H. McNeill for the phrasing.
   
5. Most of the Austrians themselves treated of capital without reference to land, as though trees grew floating in space. Two notable exceptions were Wieser, and the "Swedish Austrian" Knut Wicksell.
   
6. It is ironic that economists purport or affect to ape the methods of physics, when they delete both space and time from their subject. If they have borrowed from physics, they have taken the form without the substance.
   
7. "Something there is that does not love a wall, that sends the frozen groundswell under it, and spills the upper boulders in the sun." Robert Frost, "Mending Wall."
   
8. M. Gaffney, 1994, "The Taxable Capacity of Land." Albany Law School.
   
9. M. Gaffney, 1967, Extractive Resources and Taxation. Madison: University of Wisconsin Press. M. Gaffney, 1965, "Soil Depletion and Land Rent," National Resources Journal 4(3):537-57.
   
10. Extractive natural resources are used up by consumption. Some even call them "natural capital," but that is pushing it: one resemblance does not make an identity. Land has many characteristics; permanence (which characterizes site) is only one of these. Because of the natural origin and limited stock, the exhaustion of some resources causes the appreciation of others to replace them. Thus, exhaustible resources in situ, before they are extracted, go through a long period of price appreciation, distinguishing them from most man-made capital. Owing to the conservation of matter, many resources are not used up in consumption, but are recyclable and recycled.
    
11. An example on a social scale is the bonding imposed on nuclear generators by the US Federal Energy Regulatory Commission (FERC). FERC requires utility firms to set aside a percentage of their fuel budget in a sinking fund to pay for "decommissioning" plants at the end of their economic lives.
    
12. The careful but captious reader is reminded that our unqualified indicatives refer to land as site. We have set aside extractive resources for special treatment (cf. n. 6 above).
    
13. Some renewable land resources move: air, water, wild fish and game. The observations here need modifying or explicating to apply fully to them. Movable water, for example, springs from a watershed or aquifer that is fixed in space.
    
14. The Spanish terms for real estate are bienes inmuebles and bienes raices rooted goods). French distinguishes land and capital: inmuebles refers more to improvements and fixtures; proprietefonciere applies more specifically to pure land. German, too, has a separate term for improvements and fixtures, unbewegliche Eigentum (immovable property), while real estate is Grundeigentum, obviously stressing ground alone.
    
15. On the point, I recommend the writings of Knut Wicksell, e.g. Value, Capital, and Rent. After praising the works of Boehm-Bawerk, Wicksell faults him for treating capital simply as stored labor. Wicksell makes it also stored land, whose distinctiveness and importance he recognizes.
    
16. Somewhat overlapping, the three Horae were goddesses of Justice (Dike), Order (Eunomia), and Peace (Irene).
    
17. A classic study of this matter is W.I. Myers, 1920, An Economic Study of Farm Layout. Ithaca: Cornell University Press. It is indicative of the later neglect of land economics that one must go back so far to find the classic.
    
18. A recent application of the Physiocratic law is by David Bradford, et al., National Tax Journal, Dec. 1992, applying it to New Jersey.
    
19. 19. J.S. Mill, Principles, "Influence of the Progress of Industry and Population on Rents, Profits and Wages," Article 4.
    
20. An old limerick puts it well. "A captious economist planned to live without access to land. He nearly succeeded, but found that he needed food, water, and somewhere to stand."
    
21. It has been suggested that satellites and space stations work without land but of course they are launched and powered and controlled and supplied from the earth. Every one to date makes extensive use of the radio spectrum, a scarce bit of economic land. Even a dead satellite uses an orbit, and one of these days there will be interference -- already there is talk of star wars, and the crowded skies.