Interest as Rent

Harry Pollard

[An online Land-Theory discussion with Ed Dodson,
Michael Hudson and Dan Sullivan; October and Novmber, 2003]

Michael Hudson:

But the tendency of land-price inflation is to outstrip the rise in rent, partly because the him property inflation chokes off recovery (viz. the bursting of Japan's economic bubble since 1990). So higher land prices cannot themselves create rent.

Ed Dodson:

Seems right. Rising rents are capitalized into higher land prices, but some land prices in a given market are going to differ widely from each other.

Dan Sullivan

The anticipation of rising rents are capitalized into higher land prices, and then the anticipation of rising land prices are also capitalized into higher land prices. So is easy credit capitalized into higher land prices. Then the bubble breaks, rents begin to fall, land prices fall faster, and credit tightens.

Henry George's analysis is not incorrect, but his discounting the effect of expanding and contracting credit (and its impact on the money supply) makes his analysis seriously incomplete.

Harry Pollard:

You're quite right that land prices outstrip rent. This because two different forces affect Rent and that land prices. Land prices are the result of a collectible market. And you will recall that a collectible market is a positive feedback mechanism, whereas the normal market price mechanism is negative feedback.

As you know, my concept of economic rent is that it is the advantage given to a location by the presence of people. However, people must pay a far higher exaction than rent for the privilege of using land. I show a complete lack of originality by calling this rack rent.

However this terms been around for long while so we might as well use it.

People cannot produce without land, so they are prepared to pay whatever is asked, for the alternative is not pretty. This means that rack rent consists of rent plus wages.

Competition for land (jobs) increases the rack rent to its limit. The limit is all of wages except enough to keep labor alive (technically, alive and reproducing). This is the "Iron Law" that help to give economics a bad name as the dismal science.

Although there is a natural limit to rack rent that if exceeded will stop production, there is no natural limit to the sales price of land. In a collectible market, the sale price rests firmly on the fantasies of the owner of the collectible. So, even though it may seem illogical to hold onto a piece of land for yet higher price, the collector does. This is why there is so much vacant land -- earning nothing -- and so much valuable land supporting slums and similarly unprofitable structures.

The manic behavior of land owning collectors is the problem. Any discussion of credit, all money, or banking, is secondary to the basic problem of land collecting -- more usually known as land speculation.

Dan, I think that Henry George erred in not separating the market price mechanism control of wages and interest, from the collectible market control of land. He referred to it in different language "the robber that takes all that's left" but could've made the process clearer. Because he didn't, generations of economists have assumed that the market process that controls land labor and capital are the same.

They are not.