Land: The Unique Factor

Mason Gaffney

[Reprinted from Land & Liberty, May-June 1989]

THE WORD land in economics refers to all natural resources and their locations and extension in space. It includes many things not colloquially called land.

Any franchise, licence or privilege giving territorial rights is a right to land, at least in part, 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 priority at intersections, as railroads do.

Land is not produced, it was created. It is the world, the planet on and from which man evolved, with the sun that warms it and the forces that hold it at an optimal distance. Capital has to be formed by human saving, investment and production.

Land is a free gift, variously expressed in different philosophies as spaceship Earth, the big blue marble, God's gift. Creation, The Promised Land, or Nature. Man did not create the Earth with its resources, but rather fights over it, Man at best improves and develops capacities inherent in the free gift. It is surprising that economic analysis could ever lose sight of this overwhelming truth. Several points follow immediately.

• Cost of production places no limits on land rents and prices, neither a lower nor an upper limit. Rents may start at zero and rise without limit over time as demand rises. Land values are derived from rents.
• There is always a free marginal supply, the "extensive margin".
• 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.

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.

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 subject to rent controls; popular beaches and trails; oil and gas subject to field price controls; and so on.

Public capital used to grade and pave public rights-of-way is also open to general access, and may also suffer the "tragedy of the commons" of excessive congestion. But this is a deliberate positive public choice, and one closely associated with the social impossibility of denying free access to rights of way.

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.

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 betwen Costa Rica (equal partition) and El Salvador with its Las Catorce (The Fourteen Families); 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 guile 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 a continuing, 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 medallions, etc. are being created under our noses. In LDCs 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 U.S. and U.N. agencies from the IMF to the USMC.

Private tenure is often granted under customs that make it a prize for occupying or fixing some capital on land. Premature investment, settlement and development are frequent results, seriously distorting the allocation of labor and capital and contributing to the "Congested Frontier" problem.

The present value of land is not derived from or caused by or related to its cost of production. Present value is derived solely by discounting future ground rents, which are not a reward or an incentive for creating land.

With capital the sequence is that man saves 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, whether one pays for it or not. The expected service flow is then converted by economic man into a lump sum present value, a process called "capitalizing", i.e. making it superficially resemble capital for purposes of exchange.

Thus land value adjusts to rent, rather than an equilibrium rent's being determined at a level sufficient to reward producing the asset.

Public policy needs to promote capital formation but not land creation, which no man can do. 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, and the loss of land values would stimulate new saving by individuals to make up the loss.