Land Use Patterns:
Influence on Transport -- Why the Market Fails
to Control Land Prices
Harry Pollard
[A paper delivered at the 58th Annual Meeting of the
Pacific Division
of the American Association for the Advancement of Science. June,
1977]
Introduction
Properly to understand the transit situation, it is necessary to
retreat through the academic undergrowth to the relatively clear
glades of classical political economy with its close attention to
precise terminology. So, I shall use the term
Labor to describe only 'human exertion'; the term Capital
to describe only man-made products not in the hands of the final
consumer; and the term Land to describe only the 'original and
indestructible' characteristic of natural resources -- location.
To round off this catalogue of basics that used to be considered
important -- but is now generally skirted rapidly by students in
headlong flight to the good stuff (such as the latest economic
decisions of the State Department) we must include the classic returns
to the Factors of Production: Wages, Interest and Rent.
These were 'free market' returns to the Factors and were paid from the
product which was named Wealth. Once the returns were paid, there was
nothing more to distribute. Not a 'profit', nor an 'inflationary
premium'; not a 'monetary adjustment', nor even a bribe; nothing
remained after the Factor returns were paid. This classical
terminology was simple, all inclusive and, as Roy Harrod remarked, "revolutionised"
our thinking and "made immense progress possible".[1]
But, there's a rub! The classic returns were contingent upon the
existence of a free market and two conditions are necessary for a
market to be free. First, there must be no restriction of production
-- so that quantity changes might occur; and second, no restriction of
mobility -- so that goods might get to the market. Given these two
conditions, production and mobility, efficient and precise control of
the economy and the proper return to the Factors of Production would
be handled by the 'price mechanism'.
The Price Mechanism
The hunting action of a price around an equilibrium point used to be
called the 'price mechanism', but the term has gone out of style. It
described the process whereby any movement away from equilibrium
stimulated a price reaction which reversed the movement and thus
restored equilibrium. Price mechanism theory is under constant attack
by economists who should know better. The assaults range from an
assertion that some demand or other is 'inflexible' -- a strange
contention which is stated with ever increasing confidence until,
remarkably, the demand achieves a sudden flexibility -- to the massive
offensives of the 'imperfect competition1 theorists. These people
could have made the point that the price mechanism at times may be
somewhat arthritic, but instead use governmentally supported market
restrictions to prove ponderously (and redundantly) that a restricted
market is not free. Perhaps, 'imperfect competition' should be
re-thought as the theory of 'imperfect market control'.
Be that as it may, any discussion of the market is usually a
discussion of the price mechanism. Demand for widgets raises their
price. This stimulates production of widgets and a rush to market to
catch the higher return. This satisfies demand causing the price to
fall cutting off supply.
However, the analysis of this 'hunting' action rarely touches what we
might call the 'dickering point1 or equilibrium position.
Ceteris paribus, there will be a price for something at any
given time and place. Around this price will hunt the price mechanism.
External situations and events, whether natural or coercive, will
determine this 'dickering point'. The price mechanism does not fix the
price; it merely maintains it.
Scientists are frequently confronted by this phenomenon. Several
non-random effects combine to produce a resultant that appears random.
Any attempt to understand the result is doomed to failure, because of
the multiple variable inputs. The 'price mechanism' and the 'dickering
point' are not random, but in concert may produce apparently whimsical
and non-random effects.
Ricardo
The hunting action of the price mechanism is not difficult to
understand. Less easily grasped is the path by which the dickering
point is reached. Ricardian analysis indicates that wages and interest
suffer a constant downward pressure; that while these 'prices' of
Labor and Capital are reduced the price of Land increases. Where land
of good productivity is freely available, it fixes the equilibrium for
Wages in the economy. When productive land is not available to labor
-- even though unused and underused land may be abundant -- wages will
drop to a subsistence level: Lassalle's "iron law" of Wages!
Evidence abounds that Ricardian analysis is perceptive. Union battles
to maintain and raise wages are paralleled by governmental legislation
to accomplish the same thing. As said Plotnick and Skidmore, the
effect of the $185 billion budget for social welfare during 1972 (46%
of public spending) was to reduce .the number of poor persons from
39.4 millions to 24.5 millions.[2] As this tremendous effort takes
place in the country with the highest living standards and which draws
to itself a large proportion of the world's resources for processing,
one must view with puzzlement the large poverty population -- unless
one is a devout Ricardian!
This far too brief reminder of Ricardo is less to emphasize the
downward pressure on wages and interest, than to point to its
corollary -- the upward movement of rent. For capitalized rent is the
basic component of land price, just as land is basic to any transit
system.
Paralysis!
Rent can be expected to rise in a developing economy and this is
reflected by a rise in land prices. But this is no more than a fixing
of the equilibrium. To it must be added the action of the price
mechanism. As we know, in a demand situation the price mechanism
raises price above the equilibrium. With widgets, any such price
increase stimulates production and impels widgets to market. With
land, no such reaction can take place. Not only is there a restriction
on additional production of land, but existing land is fixed in place.
One cannot 'rush in some wilderness' to the downtown area to profit
from higher prices! The market continues to boom unaffected by the
price mechanism governor.
Yet, the story is scarcely begun. The relentless price rise is
quickly seen by the astute and land is bought for purely speculative
purposes, which activity increases upward pressure on land prices --
which encourages speculation. When the upward movement exceeds the
market rate of interest, there is little point to selling land for
reinvestment at a lower return, so the landowner hangs on. (We will
forego the tempting side excursion into favorable tax rates for
landholding!)
So, few landholders are inclined to sell. Moreover, those who do sell
stumble over a new fact of life. When widgets arrive at the market a
demand is satisfied and prices fall. When land arrives at the market
place a demand is satisfied and prices rise! The highest return is
received by the landholder who sells last. Thus, the market adopts a
final ironic stance, the very antithesis of the free market.
It becomes paralyzed by potential vendors each of whom is struggling
to be the last one to sell! As a result, a typical American land-use
topography resembles nothing so much as a patchwork quilt in which
land sales for use are derived from a mixture of connivance, fortuity
and not a little inside knowledge of political intention.
Empty Cities
The emptiness of our cities is beyond belief. Mason Gaffney provides
considerable information in the 1958 Yearbook of Agriculture about
city land-use.[3] The figures relate to the mid-50's, but little has
changed since then (except that some central cities have lost
population). For example, the Regional Planning Association of New
Jersey, New York and Connecticut, reported that in the 22 county area
of metropolitan New York City, no less than 79% of the usable area
(84% of the gross area) was undeveloped for urban use.[4] The
California Water Resources Bulletin #2 in 1955 found that 65% of
suitable Los Angeles area urban land and 90% of the 10 county Bay area
metropolitan area was not developed at that time.
The same Bulletin, based on aerial photography, showed 23% of crowded
San Francisco was undeveloped; that 75% of the Bay side of San Mateo
County (the "peninsular") was undeveloped; as was 86% of the
Santa Clara Valley. The New York engineering firm of Parsons,
Brinckerhoff, Hall & MacDonald concluded, after its survey of the
Bay area for BART (Bay Area Rapid Transit Council), that sufficient
suitable acreage was available in the Bay area for the entire
projected 1990 population of the whole state of California -- some 22
to 31 million.
This emptiness is obscured by the wide dispersement of people. For
example, in the 200 square mile Santa Clara Valley were about seven
square miles of subdivisions, but there was at least one subdivision
in every square mile. This meant that the subdivisions that "crowded"
the valley sat on less than 4% of the total area.
The picture is also clouded by the tendency of planning boards to
believe their own publicity. An area zoned 'residential' becomes
residential land, even when unoccupied. Some subdividing companies
have residential lots by the tens of thousands, but without a person
in sight.
Conclusion
So, the transit problem is clear. A bus that must drive through five
acres to pick up an acre of passengers (as in New York City) cannot be
economic. A train that takes people from a crowded (sic) downtown (Los
Angeles' downtown is rather more than 40% parking lot) to a dispersed
suburbia is facing bankruptcy, or is hoping for heavy subsidy.
Space-age technology, with its epic fantasies involving monorails,
people-movers and electromagnetic vehicles, is powerless before the
economic consequences of a land market uncontrolled by the price
mechanism.
Yet, the largest mechanical transportation system in every American
city is not only free to passengers, but is paid for by the people it
benefits.* Perhaps, here can be found the solution to the problem, but
it is less a technological than an economic problem and therefore
requires and economic answer.
* The elevator system!
REFERENCES
- The Life of John Maynard
Keynes: Chapter XI -R.F. Harrod … Avon Books.
- Progress against Poverty:
Review of the 1964-74 Decade. Robert D. Plotnick and Felicity
Skidmore. Inst. for Research on Poverty.
- LAND - the 1958 Yearbook of
Agriculture: M. Mason Gaffney, Depart, of Agriculture.
- Bulletin #87 - 1955: Regional
Planning Assoc. of New Jersey, New York and Conn.
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