Rent and Land Value

Harry Pollard

[Reprinted from a Land-Theory online discussion, January 1999]

Victor Levis wrote:

HARRY: Now, if the slave owner's taking of everything from the slave but his subsistence needs sounds like all-devouring Rent doing the same thing.

Response from Harry Pollard:

it's because it is.

Victor Levis wrote:

'All-devouring Rent'? Please explain this phenomenon. Last I saw, and I think you have agreed, Rent is a small portion of GNP. Not true of plantations' revenue in relation to slave subsistence costs.

Response from Harry Pollard:

'All devouring Rent' is the name it was given back in the 19th century. I've forgotten it's origin -- whether it was a Georgist phrase, or a contemptuous commentary by an opponent. I bet Dan or Fred knows.

It would be better called 'all devouring land-value'.

One of the discoveries that made me a Georgist was this concept, which says essentially that Rent will rise to press down wages to the margin (which is most circumstances will be subsistence).

So, if production doubles tomorrow, the doubling will not affect Wages (except in a temporary sense when prior contracts come into play). Instead, the increased production will go to higher Rents.

There has previously been some discussion about increased production keeping wages rising. In fact, they rise only in a temporary manner until All Devouring Rent removes their advantage.

(A parallel is the advantage to production of inflation. Inflation reduces the burden of interest and for that matter most contractual arrangements, but the comeuppance arrives with the economy's adjustment to the new value of money and we are back to square one -- but with some damage and some benefits.)

Victor Levis wrote:

"All devouring Rent" will constantly increase - driving Wages down.

Response from Harry Pollard:

How far down? (And I must apologize for length, but it's difficult not to bring in the peripherals to the core question.) We must look at the bottom of the Wage pyramid. Those wage-earners at what we call the "General Level of Wages". We can think of them as people with interchangeable jobs - those who could be a waitress one day, a janitor the next, a cab driver the third.

You can figure that if you can produce twice as much as the General Level, you'll get twice the wage, produce three times as much - three times the wage, and so on. As you go higher, eventually you'll come across those with premium wages -- the Michael Jordans, Madonnas, and so on. (Perhaps, these operate in the collectible market, but that's another discussion.)

Two things determine General Level Wages. The price mechanism runs Wages up and down around an equilibrium. The question which seems never to be mentioned is 'what determines the equilibrium?' Well, Georgist theory suggests the equilibrium is determined by the alternative -- and the alternative is the best available Rent-free land.

(In passing, it should be noted that modern economists regard Wages as the sole result of the price mechanism. That's why they really don't understand Wages. The price mechanism hunts around the equilibrium. Why is that equilibrium $5, $20, or $50?)

Georgists would expect the alternative to determine the equilibrium around which the Wage hunts. If there is free land available that would provide a General Level worker with $20 an hour, enough would head in that direction to pull General Level Wages up to $20.

This happened as a consequence of the Comstock Lode, a discovery that pulled enough General Level workers out of San Francisco to make it difficult for ship owners to hire crew at the rates they wanted to pay (the rates they could pay). The ships stayed in the Harbor.

When the Comstock claims dried up removing this alternative, Wages dropped and the ships sailed again.

In similar fashion, when the alternative Rent-free land is no longer available - held from use by those who wish to speculate -- the Wage earner is in a pickle. When that landholding extends to land which is actually below the margin, the alternative for Labor is to work for subsistence -- or die.

One is reminded of Rothbard's contention that it is good to invest in land that is sub-marginal. The Austrians claim, a trifle ingenuously, that the landholders' task is to "allocate land to its best use". This includes land that cannot produce a living to its occupier, which the speculator holds for its hoped for rise past the margin.

In any event, when available rent-free land is taken off the market - and the rest is heavily tied up for speculative purposes -- Wages drop to their lowest -- which is subsistence. (We could divert to a discussion of 'subsistence' but we'll save that for the moment.)

The list earlier had a discussion of rack-renting -- beginning with what it is. Of course it means wringing every last penny of Rent from the worker and capitalist. It means leaving in the hands of the General Level worker just enough to keep him alive (and reproducing).

So, in the red clay of the South, the farmer may contribute only a third of his crop in Rent -- because the other two thirds are needed to keep him and his family alive.

Whereas, in the Mekong Delta, peasant Rent reached 90% of the crop -- because the fertility was so high they could live on 10% of the crop. Both these are examples of "all devouring Rent".

In a completely different situation, Donald Trump was unable to built on a Manhattan lot. The speculative demand was too high. But, clever Trump managed to do an end run around the 'rack-rent'. Another builder had not used his official city allowance of He contracted with another building owner to buy his "storey allowance". The other builder was allowed extra storeys but he didn't use them. So, he sold the permission to Trump who could then build higher - and could pay the demanded land-value.

It was the highest price ever paid for such land -- I think $2,400 a sq. ft. -- but my memory may be at fault. Perhaps someone knows? Certainly Japanese land prices (rack-rents) were hugely greater.

Earlier, I said that it would be better perhaps to talk of "all devouring land-value" - land-value being Rent plus a speculative premium. In a post I am writing, I paint more of a picture of how this develops. I think that you may have some difficulty in seeing how the collectible land market differs from the price mechanism controlled market we know and love!