Rent versus Rack-Rent

Harry Pollard

[Reprinted from an online discussion, 13 April 2009]

Just to go over the basics little bit.

You have all read my discussion of rack-rent.

This is the highest amount that can be extracted from the producer in a monopoly situation -- which is the normal situation with land. This 'rack rent' is the 'rent' that disappears when rent is fully collected by the community. If you wish to forego the term rack-rent and just call it rent, by all means do so. In any event, it's the highest amount that can be extracted from the producer while maintaining production. The amount that drives wages down to subsistence.

I would argue that land costs are continually pushing against the edge of the envelope, taking everything that is possible to take. In an advancing economy, this might work well with producers being saved from bankruptcy by their increased receipts.

However, entrepreneurs being what they are it is likely that they will invest in a high land price in the expectation that they will be bailed out by the economy. The trouble is that if, for any reason, the economy does not advance, or stops advancing, these people who are barely making it are immediately in trouble and begin going out of business.

In a robust free economy, new businesses are continually being formed even as others fail. When failures increase and new businesses become sparse this may not immediately be noticed perhaps for a few quarters.

(If you think that statistics point accurately to something, one must remember Bernanke's remark that they could pin down a recession six months after it happened and even then they weren't sure because of inadequate data.)

Hence, Henry George's great point that the condition that leads to depression is not overproduction or underconsumption but underproduction.

Our controlled economy has ways of dealing with an economy that is not advancing fast enough and is showing weakness. Perhaps the most obvious one is inflation. The effect of inflation is to allow easier payback of a contract with cheaper dollars. It keeps the entrepreneurs alive. Standard argument at this point is that lenders will increase rates to take account of inflation. But, they are dealing with people who are already stretched to the limit and cannot pay more. It is not necessarily easy to protect the lender against inflation.

However, whatever peculiar things they do to keep the economy going, the fact is that it is existing on a knife edge waiting for a trigger that will send it in to the discard.

The trigger can be anything. The dozens of theories of depression are actually theories of triggers -- the events that send us over the brink.

I don't think the housing bubble (land bubble), as such, was such a trigger, though government fiddling with the economy probably was.

Of course, once the economy sagged other things came to light. The banking profession's use of land as collateral came home to roost. If land value was from 50 to 70% of the total cost of a home, it meant that half the collateral was disappearing down the drain, leaving banks with barely enough to pay their bonuses.

The banking excesses which came to light and have achieved the status of a recession cause did not lead to the trouble. If the economy had not gone belly-up, they might not have been noticed except by the unfortunate investors who bought the exotically named bundles of miserable mortgages.

Perhaps there is a definite period between triggers, but because politics is so involved in the economics, I think much time must be spent explaining why the trigger didn't quite hit at a given time period.

In any event, the 18 year cycle is a great piece of PR. It is getting Fred noticed and that is a tremendous asset. Several years ago at the International meeting I complained about how little time he was getting on a media. This might be a breakthrough to getting him heard everywhere.