Wednesday, April 12, 2017

"How Land Disappeared from Economic Theory"

As an introduction I'll reach back to "Forgetting History: 'Nothing Like This Has Ever Happened Before'":
Back in 2012 there occurred one of those eruptions of comment* that seem to happen for no discernible reason other than some combination of network effects and echo chambers.

The eruptions peak and die away as the crowd moves on leaving almost imperceptible ripples where there had been much thunder and fury.

This is a reflection on one of them, Henry George and the land tax, updated for current values and valuations....

.... *Even by the time we posted "The Economist Calls for More Taxes on Land" in July 2013 the commentariat was moving on:
They are a bit late getting to the party, this discussion has been pursued in relation to the means of production for years and as far as our little corner of the www goes, we made mention of the FT Alphaville robo-rentier commentary back in 2012's "The Road to Serfdom: Where the Robots Are Taking Us":
Not Hayek's "The Road to Serfdom". Rather this is a journey back to medieval society where all income is subject to taxation by the Church or the manor or both. At least in the current case it is freehold rent which is paid in cash rather than the labor rent that villeins and serfs owed their liege.

Let me explain....
In September 2013's "Ben Franklin on Labor Economics (or how to create an underclass)" I intro'd with:
The easiest way to create a dependent class is to price them out of the real estate markets.

"In countries fully settled…those who cannot get land must labor for others that have it; when laborers are plenty, their wages will be low; by low wages a family is supported with difficulty; this difficulty deters many from marriage, who therefore long continue servants and single...."
In the United States The Land Ordinance of 1785 set the cost of land purchased from the government at $1.00 per acre in sections of 640 acres.

This price was raised to $2.00/acre in 1800 but purchase was paid for in four equal annual payments.
In 1820 the price of Federal lands was reduced to $1.25 per acre with payment in cash.
An alternate conveyance in the 1862 Homestead Act maintained the $1.25 price.

Compare  the wages various craftsmen could command:

In 1785 a journeyman carpenter in New York City was paid  $1.12 ½ per day....
And today's installment, from Naked Capitalism:
Yves here. Michael Hudson regularly discusses how classical economists were concerned with h[ow] rentiers diverted from productive activity and would discuss land rents as a prime example. This article discusses how this line of thinking was abandoned and how that has led to distortions in contemporary economic analysis.
By Josh Ryan-Collins, senior economist at the New Economics Foundation, as well as a visiting research fellow at the University of Southampton Business School. He was the lead author of Where Does Money Come From? Follow him on Twitter: @jryancollins. Originally published at Evonomics
Anyone who has studied economics will be familiar with the ‘factors of production’. The best known ‘are ‘capital’ (machinery, tools, computers) and ‘labour’ (physical effort, knowledge, skills). The standard neo-classical production function is a combination of these two, with capital typically substituting for labour as firms maximize their productivity via technological innovation. The theory of marginal productivity argues that under certain assumptions, including perfect competition, market equilibrium will be attained when the marginal cost of an additional unit of capital or labour is equal to its marginal revenue. The theory has been the subject of considerable controversy, with long debates on what is really meant by capital, the role of interest rates and whether it is neatly substitutable with labour.
But there has always been a third ‘factor’: Land. Neglected, obfuscated but never quite completely forgotten, the story of Land’s marginalization from mainstream economic theory is little known. But it has important implications. Putting it back in to economics, we argue in a new book, ‘Rethinking the Economics of Land and Housing’, could help us better understand many of today’s most pressing social and economic problems, including excessive property prices, rising wealth inequality and stagnant productivity. Land was initially a key part of classical economic theory, so why did it get pushed aside?

Classical Economics, Land and Economic Rent
The classical political economists – David Ricardo, John Stuart Mill and Adam Smith – that shaped the birth of modern economics, emphasized that land had unique qualities, distinct from capital and labour, that had important influence on the dynamics of production.

They recognized that land was inherently fixed and scarce. Ricardo’s concept of ‘economic rent’ referred to the gains accruing to landholders from their exclusive ownership of a scarce resource: desirable agricultural land. Ricardo argued that the landowner was not free to choose the economic rent he or she could charge. Rather, it was determined by the cost to the labourer of farming the next most desirable but un-owned plot. Rent was thus driven by the marginal productivity of land, not labour as the population theorist Thomas Malthus had argued. On the flipside, as Adam Smith (1776: 162) noted, neither did land rents reflect the efforts of the land-owner:

“The rent of land, therefore, considered as the price paid for the use of the land, is naturally a monopoly price. It is not at all proportioned to what the landlord may have laid out upon the improvement of the land, or to what he can afford to take; but to what the farmer can afford to give.”
The classical economists feared that land-owners would increasingly monopolise the proceeds of growth as nations developed and desirably locational land became relatively more scarce. Eventually, as rents rose, the proportion of profits available for capital investment and wages would become so small as to lead to economic stagnation, inequality and rising unemployment. In other words, economic rent could crowd out productive investment....

See also Domesday Book:

Place: Tottenham
  • Hundred: Edmonton
  • County: Middlesex
  • Total population: 66 households (very large).
  • Total tax assessed: 5 geld units (quite large).
  • Taxable units: Taxable value 5 geld units. Payments of 1.15 miscellaneous.
  • Value: Value to lord in 1066 £26. Value to lord in 1086 £37.8. Value to lord c. 1070 £10.
  • Households: 30 villagers. 12 smallholders. 4 slaves. 1 priest. 17 cottagers. 2 Frenchmen.
  • Ploughland: 10 ploughlands (land for). 2 lord's plough teams. 12 men's plough teams.
  • Other resources: Meadow 10 ploughs. Woodland 500 pigs. 0.5 church lands.
  • Lord in 1066: Earl Waltheof.
  • Lord in 1086: Countess Judith.
  • Tenant-in-chief in 1086: Countess Judith.
  • Phillimore reference: 24,1