The Unearned Increment in Land Values
and Its Social Implications

William N. Loucks

[Reprinted from Real Estate Problems, Vol. CXLVIII, American Academy of Political and Social Science, Philadelphia, Pa., March, 1930, pp.67-81. William Loucks was at the time Assistant Professor of Econmics, University of Pennsylvania]

The unearned increment in land values has been discussed for many decades. Proposals have been made to do this, that, and the other, with the increment. Programs of social and economic reform have been based on the socialization of the increment. Yet, surprising as it may seem, very little attention has been given to the basic question: What is an increment in land value?

The Social Versus The Investment Increment

There is no exclusively correct definition of an increment. It may be defined in a variety of ways, the one to be selected depending upon the purpose of the discussion or the object of the analysis. In general, there are two points of view from which the increment may be considered. These may be designated "the investor's viewpoint" and "the social viewpoint."

To the investor, no increment in the value of land has occurred unless the selling price of the land exceeds the price at which it was purchased by more than enough to compensate the owner for all the costs of holding the land and for the cost of any improvement he has placed upon it. Included in these costs of holding would be the amount of interest which would have been received had the buyer of the land placed his money in some alternative investment of equivalent safety. It will be impossible to analyze carefully in this discussion just what should and should not be included in these costs of holding. Failure of investors to base their calculations on an accurate investment concept of the increment is undoubtedly responsible for the losses of many buyers.

When examined from the social point of view, the increment comes to be something quite different. An increment in value has occurred when the, difference between the purchasing price and the selling price - the latter having been corrected for a change in price levels -- is in excess of the cost of any improvement the owner has made on the land during the period of his ownership. The adjustment for any change in price level is necessitated by the fact that a value increment has occurred only when some buyer becomes willing to give in exchange for the piece of land more goods and services or purchasing power, rather than merely more dollars, than formerly were offered. It will be noted that an increment in this sense may exist even when the amount by which the selling price exceeds the purchasing price is not enough to cover the investor's costs of holding the land. It is also true that an apparent increment from the investor's point of view may, from the social point of view, be merely an increase in price due to a change in the general level of prices. If the price level has remained stable, the occurrence of an investment increment always indicates the existence of a social increment. On the other hand, social increments often occur in the absence of investment increments.

It is our purpose to discuss the social aspect of land value increments. Therefore, the term "increment," unless otherwise specified, will always refer to increment from the social point of view. This concept may be expressed as a formula: Increment equals selling price (corrected for change in price level), minus purchasing price. Many interesting questions, such as tile legitimacy of possible deductions from the selling price before the increment is calculated, cannot be treated here.[1] Although much remains to be done by way of clarifying the meaning of the term "increment," the formula expressed above will serve as a sufficiently accurate concept for use in the following discussion.

Inadequacy of Data

Probably no controversial economic question is more handicapped by a lack of statistical data than is the one being treated here. Astounding reports of fortunes made through profitable investment in land are constantly circulated. However, comprehensive surveys of the existence and the extent of increments ore so scarce as to be real curiosities. Do increments really exist? Are they, on the average, entirely offset by decrements? To what extent are increments, from the social point of view, eaten up by investor's carrying costs? What is the relation between population and increments; between public improvements and increments; between technical progress and increments? The list of questions, to which as yet there are no satisfactory answers, could be extended almost indefinitely.

It is not a mere coincidence that we know so little about increments. Actual selling prices of specific pieces of land must be known as the prerequisite of all research in this field. This information is practically inaccessible in the great majority of cases. Scraps of data may be discovered in taxation records and in deeds which are open to public inspection, but the sources of the most necessary information He concealed in private transactions and in confidential real estate accounts.

Despite the difficulties involved, a few more or less extensive searches have been made for increments or decrements which could be stated in definite dollar terms. Five of these will be reviewed briefly. Four of the five deal with the cities which rank first, second, and third in population in the United States.

Land Values in New York City

The first study, that of land values in New York City, is based upon a variety of samples of Vacant and slightly improved land.[2] It is rather difficult, in view of the complications involved, to summarize the findings, but, briefly, they are as follows. In a group of nine vacant tracts in Manhattan, the values in 1880, expressed as percentages of the values in 1921, were as follows: 44 per cent, 8 per cent, 21percent, 20 per cent, 20 per cent, 19 per cent, 9 per cent, 22 per cent, and 14 per cent. A large tract in the Washington Heights section was worth, in 1891, seventeen per cent of its value in 1921. However, investigation of a group of ten tracts sold at auction discloses that their values in 1918 varied from 71.1 per cent to 185 per cent of their values in 1921, four of the tracts having experienced decrements in value. None of these figures has been corrected for changes in the price level.

The Chicago study traced the changing values of twenty tracts of vacant subdivided land located in the North and South sections of the city.3 The periods over which the increments were calculated vary from four to fifty-three years. The aggregate price of these properties in the purchasing years was $45,104, and the aggregate value in 1925 was $221,800, the appreciation in value having been $176,696. However, this increment is not corrected for changes in the price level, and, since the period covered was in general one of rising prices, such a correction would reduce the increment. It is interesting to note that in this, as well as in other similar studies, the investigators are the first to warn against accepting the results as conclusive. The smallness of the sample used, together with the difficulties of making such an investigation, seriously reduces the significance of the results.

A study made in Philadelphia included in its scope fifty tracts of vacant land.[4] These tracts were divided into four groups, the first consisting of sixteen small tracts clustered together in the northern part of the city, the second comprising three large tracts located in the northern part of the city, the third consisting of twenty-eight small tracts scattered over the residential portions of the city, and the fourth including three large tracts also scattered over the residential sections. The increment period varied from thirteen to thirty-three years in the various cases. Taking the actual aggregate selling prices in 1913 (corrected for the change in price level) as one hundred per cent, the aggregate prices of these four groups were, in the purchasing years, respectively, seventy-one per cent, sixty-seven per cent, fifty-six per cent, and thirty-four per cent. In terms of dollars, and not corrected for the change in price level, these increments were as follows: first group, $4,692; second group, $6,915; third group, $8,505; fourth group, $16,200. The percentages represent true increments from the social point of view, since the figures on which they are based have been corrected for the change in price level.

UNEARNED INCREMENT IN GARY

These three studies attempted to measure increments or decrements in the values of specific pieces of land. Slightly different in nature was the calculation of the increase in value of all the land in Gary, Indiana,[5] The conclusion was that

the land beyond the mill-gates in Gary was worth, in 1906, not more than six and one-half millions, and that today (1917) its selling price is about thirty-three and one-half millions.[6]

However, it was found that the re-cipients of this increment had contributed to improvement of the land, and so forth, about five millions, leaving an unearned increment of about twenty-two millions. This, corrected for a change in price level, becomes about twenty-one millions as "unearned increment which has accrued in Gary in the first ten years of its history."[7]

Using a still different method of calculation, another Philadelphia study. sought to determine the trend in the value of all taxable land located in the thirty-four blocks comprising the central business district of that city.[8]

This area is bounded on the north by Street, on the east by Twelfth on the South by Walnut Street and on the west by Sixteenth Street. The values of the tracts of land were ascertained in 1910 by use of the Sommers unit system of land valuation. In 1925, the values of the same bracts were analyzed by methods identical with those used in 1910. A comparison of the 1925 figures with those of 1910 shows that the value of all the land included in the thirty-four blocks increased from $123,005,419 to $280,384,707, or by 127 per cent. These figures were not corrected for the change in price level. Every block in the district experienced an increment in value over this fifteen-year period, the increases by blocks varying from 77 to 287 per cent.

PAUCITY OF STATISTICAL DATA

Statistical data concerning present land values, past land values, and trends of land values are, extremely meager. The studies referred to are practically the only serious attempts to get at the actual measurement of increments in terms of dollars. The New York, Chicago, and Philadelphia studies are of greater significance as expositions of increment-calculating methods than as fact-finding investigations. The same could be said of the Gary study, although the approach is slightly different. The difficulties to be surmounted are great, but it is to be hoped that intensive and extensive research will bring to light many things which must be known before problems connected with changing land values can with accuracy be considered in their proper perspective. It is with a full admission that many of the fundamental requisites to such a discussion are lacking that we proceed to discuss the social significance of value increments.

In order that the problems to be considered may take as tangible a form as possible, it may be advisable to state briefly some conclusions which seem to be substantiated by the research work so far accomplished:

First: From a social point of view increments do exist. In the studies referred to above, substantial social increments in value were discovered. , Second: These social increments are probably neither as large nor as extensive in number as they are often assumed to be. As a general rule, the lucky land speculator makes known his gains, while the unfortunate one takes his losses in silence.

Third: When social increments do occur, they often accumulate rapidly. A sharp increase in value is of ten preceded and followed by long periods of practically non-changing values.

Fourth: Investors' increments are much smaller and fewer in number than are social increments. Especially if the land is held for a substantially long period, the tendency is for carrying costs to eat away the social increment. This tendency is very evident in the cases treated in the New York, Chicago, and Philadelphia studies. The importance of interest on investment as carrying cost is illustrated by the fact that for the Chicago tracts the interest

was greater than the total of the original investment in the property, the total taxes paid, and the special assessments paid.[9]

Fifth: Decrements also occur from both the social and the investor's point of view, obviously more often from the latter than from the former. This fact has frequently been completely overlooked in discussions of the increment. The Chicago investigators declare that from an investment viewpoint, "the probability of receiving a decrement is approximately one in three."[10] Sixth: Of foremost importance in this particular discussion is the strong probability that land values, both urban and rural, will increase in the future in those places where population is increasing and technical progress is occurring. From a social point of view, increments will probably more than offset decrements, leaving a net gain in the value of land or a net social increment in value.

PRIVATE RECEIPT OF THE SOCIAL INCREMENT

This net social increment in itself has no significance. It cannot be said to be good or bad. However, our legal institutions decree that this increment shall go to people who own the land during the period in which it accrues. It is this phase of the question which has real social significance. The matter ta be discussed: should be phrased: What is the social significance of the private receipt of the social increment in land values? This phraseology does not represent an attempt to beg the question, since the term "social increment" is used merely in the technical sense in which it has been defined.

In general, three distinctly different answers have been given to this question: (1) That the receipt of land value increments by individuals stimulates the best productive use of the land, is therefore something which the individual works for, earns, and should get, and that his receipt of it benefits society at large through encouraging production.

(2) That these increments are unearned income in the sense that they do not result from activities of the individual per se, but that the private receipt of them does no one in society any harm.

(3) That increments are unearned incomes and that their private recipients are getting something which someone else - the rest of society - loses.

Obviously, these opinions are widely different. They provide an interesting illustration of the variety of answers one may get to a problem in the field of the social "sciences."

The view that the private receipt of the increment increases society's production by stimulating the best use of land is widely held. The supporting arguments for this proposition follow several lines of reasoning.

The increment in the value of land is sometimes said to be the wage of the pioneer for his services in dealing the forests, putting the land into usable shape, and bearing the hardships of frontier life. It is argued that if there were not this chance of gaining through an increment in value there would not be sufficient incentive to push out the boundaries of usable land to include more and more virgin soil. The private receipt of the increment "opened the West" and "raised the curse of periodic famine from Western civilization."[11]

There are several apparent weaknesses in this line of thought. It presumes that the people who did the pioneer work received, and are receiving, the increment. It does not account for the increments which have occurred, and are occurring, in the value of urban land and developed agricultural land. It must be remembered that any increase in selling price which results from an actual investment of money and labor in a piece of land cannot properly be termed a social, increment. To what extent the private receipt of the increment can be justified on this ground in an undeveloped or semi-developed country, it is almost impossible to say. However, in a country which has passed the pioneering stage, this argument has weight only to the extent that the persons who actually did the pioneering are still holding the land. Even in such cases one could ask whether increments received bear any definite relation to the value of the personal effort of the pioneer.

INCREMENT AS REWARD FOR SERVICES

It is also suggested that the increment may act as an incentive to, and payment for, conservation, care, or administration of the use of the land. The owner builds a fence around his land to keep trespassers from injuring its productive properties. This protection and care justifies a reward. However, the cost of the fence would be taken out of the selling price before a social increment could be said to occur. Of a more intangible nature would be taken out of the selling price before a social increment could be said to occur. Of a more intangible nature would be the planning and the administering of the use of the land on the part of the owner. It is true that any service of this sort which the land owner performs assists society in satisfying its wants and should be paid for. However, can we assume that there is even the slightest relation between the increment and the real worth of these services? Are not the other causes of increments so important that it would be impossible to assume that the increment is a fair reward for these services of the owner? Moreover, if the land is being used by the owner, he is already benefiting from the care he is exercising in its use by the resulting increase in production.

Of a similar nature is the contention that the person who owns land will use it to produce commodities, even though they do not sell for enough to coyer the cost of the labor and the materials used, if the land is increasing in value and he is permitted to get the increase. In other words, the increment acts as a bonus or compensation for low selling price of the product and society benefits through production which has been stimulated in this manner. This proposition fails to take into consideration the fact that the owner does not need to use the land in order to get an increment in value which is a true social increment. If the owner is a farmer and cannot get the full market return for his labor and capital in raising agricultural products, he can turn that labor and capital to some alternative use and yet retain possession of the land and receive the social increment. Although there may be other reasons for continuing to produce when price falls below cost, it would seem to be faulty reasoning to argue that the prospect of getting an increment keeps the owner producing farm products and turning them over to society at low prices, when the same increment could be received, even though he were to remove his labor and capital to more productive alternative uses. The same argument is applied to land used for building purposes. But, would a man put up an apartment building on a piece of land when he thought that the return from the rentals would not justify the expenditure for the building, but that a prospective increment might make up the deficit? It is obvious that he would not, since he can put his capital into uses where the competitive rate of return will be received, hold the land vacant, and yet receive the increment.

Compensation for risk is another justification often advanced for the private receipt of the increment. It is claimed that the land owner bears the risk of declines in land values and that the increments, when, as, and if received, are compensation for this risk. If risk were not thus compensated, land would be used less and society would receive less product. The point overlooked in this case is that there are two distinct types of risk involved. The one is that the price at which the land can be sold may decline. The other is that the selling price of the product may not cover its entire cost. If, over a period of tune, the product does not sell for an average price sufficient to compensate for deficits incurred when the price of the product is low, the producer will restrict or will cease production. The bearing of this risk benefits society, for it is only when someone assumes it that production takes place. However, bearing the risk of declines in land values performs no social service. The land would be there with the same productive properties, even though its price were to decline, and consequently the person who places himself in such a position as to assume the risk of declining values does not perform a service for which society owes him anything - even the chance of getting possible increments. Land is not produced by man; therefore, the supply of it available for society's use does not depend upon the land owner's being rewarded for assuming the risk involved in changing values.

"Theory of Ripening Uses"

Professor Richard T. Ely has developed an interesting justification of the private receipt of the increments in land value, which he calls the "theory of ripening uses."[12] It is his contention that a period of withdrawal from productive use usually accompanies the change from one use of land to another, and that the person who holds the land during this non-income producing period has earned that portion of the social increment necessary to compensate him for the carrying costs, such as taxes, special assessments, and interest on the investment. The implication is that the owner assists in getting various pieces of land into their most productive uses, thus increasing the amount of product and earning the increment as a reward for his services.

Without question, any service the owner performs in directing land into its most productive use should be paid for. However, it must be remembered that the owner did not actually produce the land and make it available for this more productive use. It is possible that he may have prevented a two-story building from being erected, thus keeping the land clear for the ten-story building which community growth justified ten years later. If the cost of erecting and razing the two-story building would have exceeded the value to society of its use during the ten-year period, the owner of the land has saved society something and has justly earned a reward. In some such way it is possible that owners earn a portion of the increment received in the increased selling price.

However, it is to be noted that Professor Ely's theory assumes that the increment will approximately equal the value of such services, plus the carrying costs which the owner has incurred. As a generalization, this is open to question. In the first place, there are those cases in which the land k not actually held out of use during its change from one form of production to another. In such cases it could scarcely be claimed that the costs of holding the land are proper charges for the owner to levy against the increment. On the other hand, Professor Ely seems to be considering the private ownership of land as necessary or desirable, when this may be the very point hi question. The alternative to private ownership is public ownership.

The cost of publicly holding land during the period between its "lower" and its "higher" use might conceivably be much less than the costs incurred by a private owner. That portion of the increment which represents the real, socially necessary cost of transference from a less important to a more important social use should justly be repaid to individuals who bear it. That these socially necessary costs of transference coincide with increments could not be assumed with any degree of assurance on the basis of our present knowledge of land and land uses.

The preceding justifications of the private receipt of land value increments are alike in that each points to a service the individual supposedly renders society, which service is tied up in some way with the use of land. Without doubt, individuals do sometimes make land better, that is, more productive, by their efforts. Just to the extent that they do, they are deserving of a compensatory income. However, the common weakness of these theories is that they point to some service of this sort rendered by the individual and then proceed to leap across a broad gap by assuming that the size of the increment will bear some necessary relation to the social value of the service performed. In order to justify the increment from this point of view there need not be an exact correspondence; but, unless there is some substantial degree of correlation between the value of the services rendered society by the land owner and the amount of the increment, it would seem rather incongruous to justify the private receipt of the increment on the ground of personal service rendered.

EFFECT OF PRIVATE RECEIPT ON SOCIETY

Quite different is the second of the three evaluations of the social significance of the increment. This view, although probably widely held, is not often expressed. It holds that the recipient of an increment in land value has found something which no one else has lost and that, although he individually gains through the lucky find, the rest of the members of society are no worse off than they otherwise would have been.

Professor T, N. Carver, in his stimulating Essays in Social Justice, formulates very neatly the argument lying behind this view:

Some wealth is found. If I stumble upon a gold nugget, or a rich vein of valuable mineral, I cannot truly say that I have earned it, nor can anyone else. Until someone could be found who could prove that he had produced or otherwise earned it, I could not be accused of depriving anyone else of his earnings. In the opinion of the present writer, the site value of land belongs in the class of findings, rather than in that of earnings or stealings.[13]

Professor Carver, obviously does not agree with those social reformers who contend that "when one gets something for nothing, someone else gets nothing for something." The question of whether or not it is possible for one individual to get an unearned income without depriving others of something earned will be discussed in detail later. In the meantime, it should be noted that Professor Carver's attempt to prove by analogy that land value increments are findings which take nothing from anyone else is fatally weakened by the fact that the two eases he cites are not at all comparable. The man who found the gold nugget produced the gold nugget in the true meaning of the term "production." Of course, he did not actually create the gold, but production does not mean the creation of materials. He did bring the gold into the range of society's use.

He was the means of providing society with something possessing want-satisfying power which society previously did not have. By finding and taking the nugget to a jeweler, who gave him in exchange for it the means of purchasing other goods and services, the finder actually increased the amount of gold available for the satisfaction of people's desire for that commodity, just as certainly as does the man who swings a pick in a gold mine. In other words, the finder of the nugget increased the amount of wealth hi the possession of society and unquestionably deserves a reward for having done so. On the other hand, the recipient of the increment in land value, assuming he did not improve the land in any way, has not increased society's ability to satisfy its wants. He has increased neither the supply nor the productivity of land. The increment has not resulted from bringing to any individual in society anything which would increase that individual's power to satisfy his wants. The land was the same when the increment receiver sold it as when he bought it, and the increment cannot, therefore, be compared with the value of the gold nugget discovered for the first time.

An accurate analysis would show the relative positions of these two individuals to be as follows. The finder of the gold nugget produced one gold nugget and received or acquired the exchange value of one gold nugget; the recipient of the increment produced nothing, since it is assumed that he did not improve the land while it was in his possession, but he received or acquired the increase in the exchange value of the piece of land. The two cases are clearly unlike in essentials, and Professor Carver's mistaken reasoning is all the more noticeable since it follows almost immediately his statement:

From Adam Smith down, economists have recognized the fact that the fortunate owner of a piece of land whose mere site value, irrespective of all improvements, has increased on his hands, is simply a recipient of good fortune and that this part of his wealth does not represent his own earnings in any way, shape, or manner.[14]

Incidentally, it may be noted that this statement is not strictly true. Some of the previously cited justifications of the increment as earned income find supporters among economists of first rank. It is a small matter that this analogy has been eonfused. It is a matter of much greater importance that many people measure the social significance of the private receipt of land value increments hi similar terms. The soundness of the contention that increments thus taken by individuals cause no one else any loss will be further analyzed in succeeding paragraphs.

The term "unearned income" has been used in the foregoing discussion. Before proceeding to an analysis of the position of those who emphasize the unearned nature of land value increments, it may be well to pause for a brief statement of just what an unearned income is.

WHAT IS "UNEARNED INCOME"?

Whenever anyone receives an income not resulting from personal effort, either physical or mental, which effort has made available to society in general want-satisfying goods or services, he is said to have received an unearned income. In the first instance such an income takes the form of money, but, as spent by the receiver, it actually becomes goods and services. The total product of all economic activity during a given period - for instance, the year 1930 - may be thought of as a heap of goods and services which satisfies people's wants. Individuals draw upon this heap for goods to satisfy their individual wants. Their power to draw out goods for their own use is determined by the number of dollars each has to spend. One way in which these dollars can be obtained is to add something to this heap - that is, make and throw on the heap food, automobiles, candy, tobacco, physician's services, or any other want-satisfying commodity. Dollars obtained hi this way constitute earned income. Dollars obtained in any other way are unearned income.

Care must be used in applying this concept to actual cases, for occasionally an income which upon first thought appears to be unearned, turns out in reality to be earned. For instance, a man obtains dollars as interest on bonds which he has previously purchased. As a receiver of interest he would seem to be adding nothing to the product through personal effort, and yet he cashes his dollars into actual goods and services which he draws from the heap. However, the fact is that he has added to the heap through personal sacrifice and that his income is therefore earned, provided he himself saved the money with which the bonds were purchased. He has refrained from using purchasing power in his possession and, through purchasing bonds, has turned his purchasing power over to others who have used it as a means of livelihood while they worked at the construction of a new factory building, or some other piece of industrial equipment. Through the necessary assistance this man has rendered in the construction of the building, he has assisted in increasing the size of the heap from which are drawn the goods he buys with his interest payments. On the other hand, careful analysis may show that some incomes which apparently are earned actually are unearned.

Needless to say, many individuals in society are receiving unearned incomes in the sense in which we are using that term. These incomes vary a great deal in nature, but all have one thing in common - their recipients draw goods and services from the national heap without adding, through their personal efforts, goods or services of equivalent value.

INCREMENT AN UNEARNED INCOME

An increment in land value, from the third of the three viewpoints being discussed, is a purely unearned income. If the increment is a real social increment, it does not result from any personal effort, either physical or mental, on the part of the recipient. By definition, a social increment is not the result of any improvement on the land. And yet, when a sale takes place and an increment is realized, or when the annual rental received for the use of the land increases, the extra dollars thus acquired by the individual owner constitute purchasing power which can, and will, be used to take from the total product of society certain goods and services which the increment receiver wishes to consume. Nothing has been added to the national income by the individual in the capacity of a land owner, for it is being assumed that the physical properties of the land remained unchanged while the land was in his possession. As a land owner, he therefore has not assisted society in satisfying its wants, but he has acquired for his own use a portion of the product which society turns out during the year.

But, it may be asked, how can the land increase in value if the owner has not done something to it? Does not the mere fact of increased value prove that the owner has increased its productivity? In contrast with most other things, the land area of the earth is limited, that is, there are just so many acres and, within very narrow limits, this cannot be increased. More important is the fact that the area of any particular kind of land is limited. Land has already been created, and when created its area has been fixed for all time. The productivity of a given kind of land can be increased by methods man has devised, and, incidentally, if man actually does increase the productivity of any piece of land so that it produces more economic goods than it did before, he is entitled to a payment for this service. However, the supply of land cannot be changed.

The price of anything which is absolutely limited in supply is determined by the highest amount any potential user is willing to bid for it. And so it is with land. The amount the owner can receive for it by way of a sale price, or as an annual rental for its use, is determined simply and solely by the amount the highest bidder is willing to offer him for it. No matter how high that bid, the supply, so far as that particular piece of land is concerned, will not be increased. Therefore, anything which increases any potential bidder's desire for a piece of land, or the amount he is able to pay for it, will cause the price the seller can get for it to increase, even though the land remains exactly the same in its physical properties. As has been stated, in a community where population is increasing and technical progress is occurring, the amounts being offered for these limited areas of land will tend to increase. This is what is meant when it is said that pure land values are unearned by the individual because they are socially created.

The unearned nature of a social increment in land value has been discussed at length many times. Far less specific and substantial has been the analysis of the social effect of the private receipt of such an unearned income. In a general way, many writers have condemned the institution of private ownership of land on the ground that it enables a land owner to put into his own pocket something which not he, but the community as a whole, has produced. But, does the private receipt of the increment actually harm society? Does it take away something someone else has produced? Does it decrease the national income and the per capita living standards?

It has already been shown that land increments cannot be considered merely as "lucky finds." The person who finds something and then makes that thing available for society's use is in a different position from one who finds an increment in land value. The latter makes nothing available for society's use which society did not previously have. It remains to be seen in what way the private receipt of the increment actually harms society.

INCREMENT AN INCENTIVE TO SPECULATION

In the first place, the possibility of receiving the increment encourages speculation in land values and this, in turn, keeps those persons actively engaged in this speculation from doing anything which adds to the stock of commodities and services constituting society's total product. Speculation in land thus decreases our national income. If Mr. Smith is able to gain an income over a period of years by receiving land value increments, he can use this income to purchase things he desires during that period. This means that he is living and consuming without adding through his personal efforts to the stock of commodities society is turning out each year. He draws from society's income stream goods and services to the amount of the increment or increments he receives, but lie does not put into the income stream goods or services of equivalent value. If the possibility of gaming a living through the increment were closed to him, and all other sources of unearned income were closed also, Mr. Smith; would have to produce through personal effort goods and services which would add to the national income before he would be permitted to draw out any goods and services. Thus, by eliminating the possibility of getting a living through unearned income, many Mr. Smiths might be forced to produce goods and services which would constitute additions to society's income stream.

Secondly, private receipt of the increment encourages land speculation, which sometimes results in the withholding of land from use. The social waste involved in this cannot be calculated with any degree of accuracy. It is interesting to note the claim that from fifty to eighty per cent of the land area of the United States is being held out of use, although these figures are not meant to represent the actual resultant waste.[15] A table showing the percentage of the total land which is vacant in twenty-four cities in the United States discloses figures ranging from two per cent to seventy-five per cent, just one-half of the cities having in excess of twenty per cent vacant.[16] Some of this vacant land is, of course, publicly owned. Some of it, although listed as vacant, may be used for playgrounds or other similar purposes. Offsetting a portion of the waste accompanying this substantial amount of unused land are the socially necessary and desirable periods of non-use which sometimes accompany changes in the purpose for which specific pieces of land are used.

Land speculation also may force into use land less suited for a specific purpose than is other land which is held out of use. It may be that hi some cases urban residential sites are withheld from use so extensively as to force less desirable suburban sites to be used. It is also pointed out that the development of an outlying residential section, at the very time equally desirable and more centrally located residential sections are held out of use, incurs still another waste in the form of the longer streets, the car lines, the power lines, and so forth, which have to be constructed in order to get past the vacant tracts to the suburbs.

EFFECT OF SPECULATION ON NATIONAL INCOME

Not only does the speculation in land values which results, from the private receipt of land value increments decrease the amount of national income, but it also causes a redistribution of that income among individuals in such a way that the person who receives the increment gains, or goods and services, at the expense of all the other members of society. Just how this comes about must be noted carefully. Failure to do so has often led to an incorrect evaluation of the central theme of proposals to adopt a "single tax" or to nationalize property rights in land.

A hypothetical case may be used to demonstrate the redistribution of national income caused by the private receipt of the unearned increment. Mr. Jones bought a tract of land in 1924 for $500,000 and sold it in 1929 for $1,000,000, not having placed any improvements on the land in the mean-time. Just what should be deducted from the $500,000 increase in value before the social increment is found can not be discussed here, The items which possibly should be deducted, such as taxes, for instance, would be so unimportant that the entire $500,000 can be considered, for the present purpose, an increment in value from the social point of view. It is assumed that no change in the price level occurred between 1924 and 1929.

Just how did the $500,000 which Mr. Jones received as an increment affect the other members of society? The transaction must be considered as a whole in order to answer this question accurately. What Mr. Jones did in 1924 was to give up $500,000 worth of purchasing power, that is, he refrained from consuming $500,000 worth of goods and services which he had the power to consume. Between 1924 and 1929, Mr. Jones did nothing except hold the title to the tract. Consequently, in 1929 the tract had the same physical characteristics which it had in 1924. In other words, Mr. Jones personally did nothing during that period to increase the national product of food, clothing, furniture, and so forth. However, the scarcity value of the land having increased, Mr. Jones was given, in 1929, In return for his title to the land, $1,000,000 worth of purchasing power which, it will be assumed, he spent for goods and services. Since the price level did not change during the period, Mr. Jones is now able to - and it is assumed he does - go out on the market and purchase just twice as many goods and services as he gave up in 1924, when he purchased the tract. In other words, he now draws from the national product or income two hats instead of one, which he refrained from consuming when he bought the tract; two auto-mobiles instead of one; two suits instead of one; and so on. Although Mr. Jones has in no way increased the national income, he draws from that national income twice as many goods and services as he refrained from drawing out in 1924. In doing this he has taken hats, shoes, clothing, automobiles, and so forth, which the rest of the members of society would have received had Mr. Jones not been permitted to take the increment in land value,[17]

SACRIFICE OF ECONOMIC GOODS AND SERVICES

It might be argued that the person who bought the tract from Mr. Jones in 1929 sacrificed the consumption of $1,000,000 worth of commodities and services which he had the power to consume, and that, as a consequence, the extra goods and services received by Mr. Jones came from the buyer and not from all the rest of society. However, the buyer is not the real abstainer. He purchased the tract only because of its immediate or potential income-producing power. Individual buyers of the tract may go on refraining from consuming in order to buy the tract at higher and higher prices. But, assuming the prices paid for it are justified by the value of its potential product, just so soon as that tract is actually used for any purpose, the amount charged for its use will be the means of passing on to the rest of society the sacrifice of economic goods and services which the buyer has borne temporarily.

For instance, suppose that Mr. Brown purchased the tract from Mr. Jones and that Mr. Brown now leases the tract to someone who erects an office building. If Mr. Brown has been wise in his investment, the annual rental of the land will yield possibly $50,000, or five per cent on the capital sum. Mr. Brown will use this $50,000 each year to buy goods to consume, and these goods and services which tie rest of society is thus forced to do without are the real sacrifices society makes in order to turn over to Mr. Jones, the increment receiver, the extra goods and services he was able to consume in 1929 because of the increased number of dollars he had available for spending. Mr. Brown, the user of the tract, has temporarily borne this burden of consuming fewer goods, but he is compensated, and the burden is actually passed on to society in general through the prices its members pay for the use of the site on which the building has been constructed. The community as a whole, aside from Mr. Jones, has fewer goods and services to use, and goods and services lost by the rest of the community have found their way into the hands of :the increment receiver.

The transaction could; be traced through in other ways. It .would be easy to see society's loss if Mr. Jones had purchased the tract from a city in 1924 and had sold it back to that city in 1929, the prices being as stated in the preceding illustration. Assuming a stable price level, the city in 1924 received less purchasing power for the tract than it had to give to recover the tract in 1929. Since it is being assumed that Mr. Jones did not add any improvements to the tract, the citizens, other than Mr. Jones, clearly had fewer goods and services to use, and Mr. Jones had more goods and services as the result of his receipt of the increment. When Mr. Jones buys the tract from an individual and sells it to an individual, the result is exactly the same, although not as easily seen.

In fact, the analysis may be simplified still further. The receivers of social increments in land values are in all essentials exactly comparable to persons whom we might imagine to be endowed with the magic power of making every dollar received turn into two or more. If there were individuals in society who had discovered a way of causing dollars to give birth to other dollars, what would be the effect on the other members of society? In such a case the increase in the amount of money would cause an increase in the price level, enabling those in whose hands dollars did not increase by magic to buy less than they formerly could buy. On the other hand, the increased amounts of money in the hands of a few would increase their individual purchasing powers by amounts greater than the increase in the price level, and they would be able thereby to get and to consume the goods which the rest of the members of society are no longer able to buy.

CONCLUSION

In conclusion, it should be reiterated that increments in land values from the social point of view are unearned incomes, and that, whenever society permits any individual to live on an unearned income, the goods and services he consumes actually are taken, although indirectly, from the other members of society. The private receipt of social increments not only reduces national income by encouraging speculation in land, but distributes it in other ways than on the basis of productivity. It not only decreases the per capita standard of living by reducing the national income, but lowers the standards of some individuals in order to raise the standards of others. On such grounds rest the continuous and the vehement condemnations which for many years have been heaped upon the institution of private property in land.

It would be unfair to conclude this survey without emphasizing the need for a great deal of factual research and theoretical analysis in the field. The concept "increment in land value" is still a hazy one and needs to be defined more accurately. Facts concerning actual land values and trends of land values need to be found and analyzed. The relation between the private receipt of the increment and the productive use of land remains to be thought through in all of its ramifications. Answers to such problems, if they are obtainable, would afford the basis for discussions centering around the socialization of the increment, the "single tax," and the nationalization of land titles. From such considerations one is led to that group of baffling questions connected with vested rights and the whole institution of private property.

NOTES AND REFERENCES

1. For discussion of these questions, see: G. B. L. Arner, "Land Values in New York City," Quarterly Journal of Economics, 36:545-48 (Aug., 1922); H. L. Shannon and H. M. Bodfish, "Increments in Subdivided Land Values in Twenty Chicago Properties," Journal of Land and Public Utility Economics, 5:29-36 (Feb., 1939); W. N. Loucks, "Increments in Land Values m Philadelphia," Ibid., 1-.469-77 (Oct., 1925).
2. Arner, op.cit., pp. 545-80.
3. Shannon and Bodfish, op.cit., pp.28-47.
4. Loucks, op.cit., pp. 469-77.' 5. R. M. Haig, "The Unearned Increment in Gary," Political Science Quarterly, 32: 80-94 (Mar., 1917).
5. Ibid., p.84.
6. Ibid., p.92.
7. W. W. Pollock and K. W. H. Scholz, The Science and Practice of Urban Land Valuation, pp. 189-205.
8. Shannon and Bodfish, op.cit., p.37.
9. Shannon and Bodfish, op.cit, p.43.
10. A.S. Johnson, "The Case against the Single Tax," Atlantic Monthly, 113:33 (Jan.., 1914).
11. R. T. Ely, "Land Income," Political Science Quarterly, 43: 410-13 (Sept., 1928).
12. T. N. Carver, Essays in Social Justice, p.282.
13. T. N. Carver, Essays in Social Justice, p.281.
14. E. O. Jorgensen, the Next Step Toward Democracy, p. 20; R. C. Macauley, "No One Owns Land," Independent, 104:76 (oct. 16, 1920).
15. H.B. Dorau and A. G. Hinman, Urban Land Economics, p. 138.
16. 17. Of course, just to the extent that decrements occur, this effect of the private receipt of increments is offset. But, as has been pointed out, in a community experiencing population growth and technical progress, increments are rather certain to more than offset decrements, leaving a net social increment to go into the bands of individual owners.