Land Economics:
To the Heart of the Matter

Wendell Fitzgerald and Cathe Smeland

[Reprinted from CONSENSUS, April 1989]

Can you imagine an economic analysis based on the Green promise of neither right nor left but in front? Can you imagine an economic system consistent with the Green pillars of ecological wisdom, personal and social responsibility, grassroots democracy, and nonviolence? Such an economic analysis exists.

Not only that - It has been attracting Green attention in recent years and deserves even broader consideration by the movement. It's an idea with a long history of support in the writings of the likes of William Perm (1693), Tom Paine (1797). John Stuart Mill (1848), and Leo Tolstoi. It's basic principles were explored in detail over 100 years ago by the American political economist and social philosopher. Henry George in a book entitled Progress and Poverty written and published in San Francisco in 1679. A world wide movement based on these ideas continues to find George's ideas increasingly relevant to a broad range of today's social, economic and environmental issues.

The solution proposed! by George involves the rather mundane sounding concept of taxing land values, otherwise known as "land value taxation." Application of this idea is being vigorously pursued by grass roots property tax reform movements in many states and in particular in Pennsylvania, where nine cities, including Pittsburgh, have adopted it in a significant degree. The idea has already found application by local governments all over Jamaica, New Zealand. Australia, parts of western Canada, and Taiwan. The principle involved has found approval with Greens who have studied it in the San Francisco Bay Area, San Diego, and Scotland.

The analysis might well be of interest to Greens because it focuses on the economics of land - the economics of Mother Earth herself. The land question is at the heart of long standing issues of social and economic Justice as well as issues of environmental degradation. Familiarity with some of the basic principles of the economics of land will Illustrate the scope of the land question.

Landowners don't create land value

The first principle of the economics of land is that land is one of the essential ingredients in all economic activity. There are three "factors of production," as economists call them. They are land, labor and capital. All fundamental economic analysis is based on determining the dynamic relationship between these factors. In spite of this, economists and the public in first world nations generally feel that land is no longer important to economic analysis because it is judged that capital, the human-made tools of production, is so much more important. Many economists go so far as to consider land Just another form of capital and dispense with the distinction altogether, thereby conveniently dispensing with the land question. It Is obvious, however, that humans are and will continue to be totally dependent on land for all raw materials used in production and for sites upon which to conduct not only all economic activities but every other human activity as well.

Land is distinct from capital because it is not produced by humans as is all capital. As a result land gets its value and reacts to taxation in a totally different way than capital. Although these distinguishing features may seem technical at first glance, the distinction between land and capital is not merely a technicality. Blurring the distinction between land and capital has the same magnitude of significance as calling slaves (human beings) the property (capital) of their "owners"! ... and leads to equally unacceptable consequences.

The second principle of the economics of tend is that land gets its monetary market value from the community as a whole and not from any Individual owner. Stated in another way. this important principle is that the value of land is created by the community, not by the Individual. Restated again it says that the individual does not. Indeed cannot, create the value of land. It is society, the community of all individuals existing and acting together, that creates land value.

All human made capital and wealth is created by human effort, usually using other capital (tools) in the process. Land, however, is not made. It Just is and has been provided free by the Creator. Originally, land is free for the taking and has no market value but as land is settled and population grows a market for land is established and the price of land is bid up. In addition to the effect of growing population, land value is increased as the productivity of the community is increased by general educational and technological advances. Land value is further increased by anything that makes the community a nicer and more desirable place to live such as public improvements and public services. It can be said that all general progress in society is reflected in rising land values, and indeed, is reflected no place else.

Land held for ransom

The significance of these principles is that the owner of land per se does not provide anything to the economy which was not already in existence. The land owner as land owner does nothing creative or productive. All the land owner does is put a fence around a piece of land and charge the rest of humanity a fee (land rent) for access to it or, if he uses the land himself, he avoids paying land rent to someone else. In either event the landowner no more deserves or earns the rent to land than the slaveowner deserved or earned the production of the slave. A theft and a terrible Injustice is involved in both instances. The fact that a current landowner paid good money for the land does not suddenly make land rent an earned income any more than paving money for a slave entitled the owner to the slave's production.

If a landowner assumes the role of labor and/or capital and builds a building and sells it or leases It out. something that was not in existence before Is being provided, and compensation for It Is deserved and earned. Landowners as landowners claim to provide a service by making the land available for use. They claim that If it were not for them land would not be made available when and as needed. For this they claim to deserve compensation.

Such claims are patently absurd. The land Is already and will always be available. Landowners do not make land available, they hold it for ransom!

This is not to say that landowners are bad or that private ownership of land should be abolished. Private ownership of land has a positive aspect in that it provides for secure possession or tenure of land and this guarantees to labor and capital their just reward. This benefits the community by encouraging labor and capital to provide housing and other needed improvements. It is the private ownership of land value and the private collection of land rent which harms society.

Since land value and land rent are. in essence, a gift of society to the landowner, the incentive Is and has been to grab as much land as possible to cash in on this gift. The result is land monopoly, land speculation and a powerful incentive to abuse and misuse the land.

In the U.S.. the best estimate is that 5% of the people own 95% of the ownable land and natural resources. Federal, state and local governments own about 40% of the total, which is to the benefit of society as a whole. That aside, the other 60% of the land is even more monopolized in ownership than other valuable assets such as stocks and bonds. Land is useful and necessary in itself, but add to that the free gift of ever increasing community-created land value and the land is bound to be sought after and held on to by all means fair or foul. The historical plight of American Indians and the current victims of right wing death squads In Latin America attest to this fact.

Land speculation results in rapidly rising costs for land beyond anything supportable by actual economic usefulness or productivity. The high cost of housing and the tragedy of homelessness are really problems of land speculation. The accompanying chart identifies the problem by showing that the cost of land has gone up more than six times the cost of labor and materials for housing between 1960 and 1980. Land as a percentage of total housing costs has continued to rise since then. In a related issue, the current Savings and Loan debacle is. for the most part, nothing more than a failed attempt to cash in on the promise of rising real estate, i.e., land values. Obviously land speculation is not always successful and when it is not the losses involved are usually not paid by the players.

Land speculation has the additional effect of creating urban sprawl. The Incentive for land owners is to hold land for its Increase In value rather than to build improvements to take advantage of real economic opportunities offered by locations closer in to the center of cities. People and businesses who want to build and/or locate in the community are forced to find more affordable and available land sites further and further out from city centers. This gives rise to the familiar pattern of leapfrog development. The impact on the community is devastating. The environment is torn up unnecessarily, the supply of affordable housing is curtailed at its inception, people are caught up in the congestion and pollution caused by forced reliance on the automobile, all economic activity is made more costly.