The Dynamic Law of Rent

Harry Pollard, David Hillary and Mark Monson

[Reprinted from a Land-Theory online discussion, August, 2001]

DAVID HILLARY (22 August 2001)

The arguments that rent will rise given better institutions are rather simple:

Open economy argument -- labour and capital receive the world wage rate and world interest rate respectively (after accounting for tax and rent), if tax on wages and interest are removed and productivity improves, after tax before rent wages and interest increase above the world wage rate and interest rate and so labour and capital flow into the small open economy and rent rises to restore equilibrium in the labour and capital markets.

Output proportion argument -- rent is positively co-related to output and better institutions leads to more output and thus more rent

Perhaps another way of put it is that rent is the measure of the desirability of land for human habitation, employment and use and so anything that improves life will increase rent. HARRY POLLARD: But, the real question is why is it desirable?



HARRY POLLARD (23 August 2001)

David, you made what I believe are incorrect assumptions. You made an earlier one in which you thought that land would be difficult to value. It isn't - in fact it's pretty easy. Trying to do it from capital values, which you suggested is difficult - as you are mired in abstruse calculations - but normal valuation of land is not at all difficult (so long as you stay away from land residual calculations.

I'm not sure what you mean by the "world wage rate and world interest rate". Maybe they are theoretical concepts that don't exist in real life.

It is true at the moment that increasing production is swallowed by land values. But, this is because landholders don't operate in a price mechanism controlled free market.

You'll recall the "all-devouring Rent" idea - that increasing production is swallowed up by ever increasing Rent. Well, if you do what is proper and use the term Rent to mean "the external community created value that attaches to a location" - then there is no such thing as "all devouring Rent".

If you use land-value to mean the present collectible price of land, then that will do some devouring - swallowing much of the increased production which results from invention, innovation, and market freedom. In other words, the "rack-renting" that has been with us through the ages is still alive and kicking.

So, in a Georgist society with Rent collection - not land-value taxation, though by then Rent and land-value will no doubt be the same thing, Rent will not constantly absorb new production.

I fear that sooner or later, we will have to change our mind set. Rent is not something to avoid - it seems to frighten those who consider it a tax. Rent is not an imposition that one seeks to avoid.

Rather, it is an advantage to be welcomed - even if 100% of it is recaptured by those who created it. In fact, in the geocracy, the best entrepreneurs will invest extra in buying a site in the expectation that Rent will increase (and be collected) on that site.


David wrote: "If land were not plentiful (its not), and one particular part becomes more desirable compared to the rest, its rent will rise. In an open economy, productivity increases lead to rent increases because it makes the land in the economy better than other land in the world."

Land is plentiful - in quantities and qualities that could support a global population 10 times the present. That is, if we have sensible land use in a complete market economy.

However, stupidity, ignorance, and venality, can make a mockery of that statement.

Land is plentiful - it's just not available.

The statement "productivity increases lead to rent increases" just isn't so. (Check my post to Dan Sullivan.) It can lead to land-value increases with zooming land prices - but not directly to increased Rents.


MARK MONSON (23 August 2001):

Harry Pollard wrote: "In Henry George's unbounded savannah every part of the land is exactly the same. When the first family of settlers arrive, they may settle anywhere -- with the same advantage from the location. So, where does the second family settle? And the third? Why they settle where they do indicates the beginning of Rent."

Locating in close proximity to the first settlers offers advantage to the first few new settlers, but their sites wouldn't have economic rent because every location would still be at the margin assuming that none of the farmers take more land than he can use.

If the farmers took land for speculation, the new settlers may be willing to pay rack rent to live near the others but that isn't economic rent. economic rent wouldn't begin until enough settlers grouped together so that a certain location would offer advantage over any location near the other settlers, like when a blacksmith comes to the area and he sees that paying for a centrally located site will benefit trade more than a site on the fringe of the homesteads (the rent free margin). that kind of location advantage wouldn't exist when the community is only three farms.