Land Value, An In-Depth Treatment
The Theory of Land-Values and the Variance in its Behavior Compared to Durable Capital Goods
Here is the first part of a three-installment exploration by David H. Chester, on the topic of land values and their economic characteristics.
by David H. Chester
The macro-economic term “land-values” applies to the value of the actual sites, plots or areas of ground, without including any buildings or other artificial improvements, even though these features may be in place. The value of a site is determined during trading, when the selling-cost and the buying-price simultaneously become equal, a duality principle that occurs in much of macro-economic analysis. However, it is the opportunity for its utilization, expressed in terms of the ground-rent, that endows the land with value. As communities develop and the status of a region improves, there is a consequent rise in the trading-value of the land, the implications of which are explained below.
In the introductory Section 1, a review is made of the broad range of uses to which the classes of land can be put and the effect of changes in its status. Section 2 explains the cause of ground-rent and how the land-value is derived from it. Section 3 compares the way that macro-economic investment in land behaves and differs from that of durables, and in Section 4 a summary of the analysis is given with conclusions.
1. The Uses and Abuses of the Land
In general, the land may be used for many different purposes, laying within three broad classes and two kinds of localities. The associated categories are shown in Table 1.
TABLE 1 CLASSIFICATION OF THE LAND BY ITS USE CLASS LOCALITY LAND STATUS - CATEGORY, WITH EXAMPLES Productive Rural 1. Forestry - growth of timber, soil conservation.
2. Pastoral - grazing of cattle.
3. Extensive Farming - unirrigated crops.
4. Intensive Agriculture - irrigated crops, market-gardens, orchards, green-houses, paddy-fields, dairy, small animal enclosures, fish-ponds and storage buildings.
Urban 5. Industrial - manufacture of goods, building construction.
6. Commercial - shops and markets, offices, hotels, warehouses, restaurants, social and entertainment centers, casinos, banks, garages and other services.
Residential Urban 7. Domestic - houses, rest-homes and refuges. Public Urban or Rural 8. Recreational - sports and holiday centers, parks, fun-fair grounds, zoological and botanical gardens.
9. Municipal Service - hospitals, social and health centers, public baths, waste and water storage and treatment plants, schools and training faculties, libraries, museums, emergency services, law enforcement and detention centers, cemeteries and places of worship.
10. Communications - telegraph and post-offices, radio and T.V. studios and transmitters, telephone exchanges.
11. Transport - roads, highways, bridges, under-passes, car-parks, railways, rivers, canals, footways, cycle- paths, bus-stations, air/sea ports, docks and wharves.
12. Government – administration and meeting centers.
13. Protected - nature reserves and bird sanctuaries.
14. Energy - Power generating stations, electrical sub- stations and distribution lines, gas and oil refineries.
Public and National 15. Military - camps, airfields and training grounds.
16. Knowledge – higher education and research centers.
Except for the last 4 uses, these categories of land have been roughly graded from the least to the most useful. As one passes from a region of wilderness to the heart of a great city, the land-values progressively increase - most of a country's land-value being concentrated within relatively small areas, having high population densities.
1.1 Effect of Changes in Land Status - Speculation and Economic Activity
The rural land, which surrounds an expanding community, is progressively converted into urban use. The areas involved then change status, followed by a rapid rise in the value of each of the associated sites. The same thing happens whenever a small town is connected to a national transport system, such as a railway. Immediately there is an increase in the value of the sites in the area, which lays near the proposed railhead. Land speculators take advantage of these changes by obtaining advance information about the expected development (which has its price, too). Then they purchase the sites that will be needed. Alternately, having already invested cheaply in sites on out-laying areas, the speculators manage to bribe the local authority into developing these areas, so as to boost the value of their recent acquisitions.
These speculative actions exploit the improved status and earning power that the investment of public money will shortly endow to the community. In effect, the authority is persuaded to hand out to the speculators an increase in their sites' utility, enlarging their land-values. But even without deliberate land speculation, the same thing continuously occurs. For example, the gradual establishment and improvement of shops, offices and cafes in a residential neighborhood, enhances the status of many sites in the locality, raising the selling-price that a particular home will eventually bring to its owner.
Thus the land that is purchased ahead of such developments, directs money into the speculators' pockets, from where it is used to purchase consumer goods or for more investment. Whilst being unjust micro-economically, this re-distribution in itself does not significantly alter the macro-economic tempo of the community. Unfortunately, the landlords also tend to monopolize their access rights. They are more interested in the gains from their speculative dealings than in running efficient businesses, which take time and effort to establish. Land that is withheld in this manner will not be properly used, if at all. Then the remaining sites become more expensive, due to the keener competition for their access rights. The ground-rents rise, with the cost of making and distributing the goods. Later this results in inflation and a corresponding reduction in the total amount of macro-economic activity. However, these are not all of the adverse effects that occur.
With less available land, some of the house-holders are forced out to the more-remote sites having lower utility, and the authority discovers the need to use a larger proportion of the municipal taxes for building and maintaining the necessary roads etc. By avoiding an increase of local taxation, which otherwise would add to inflation, the sociological benefits probably have to be reduced, with an associated raise in the crime rate. This unwholesome situation also worsens the expenditure on transport, lengthens the rush-hour traffic-jams and eventually it increases the amount of unemployment. The standard of living drops within the region and the degree of poverty grows. Thus it is land speculation on numerous valuable unused sites, that causes this condition of stagflation to occur, (in contradiction to the inflation/employment theory of Philips [see Phillips A.W. “The Relationship Between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom”, Economica, November 1958]). The progress of the now wastefully sprawled expanded communities has been significantly retarded.
In extreme cases, the monopolistic power of land ownership is so widespread that the tenants have nowhere else to live. The rack-rents, which the mercenary land-lords can then extract from these workers, include most of their wages. Thus land monopolization is able to reduce the conditions of these serfs, to a state that is worse than slavery. The subject of rent is discussed in greater detail below.
Next week: Why and How Land Has Value
Copyright 2002 by David Chester. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without the express written permission of David Chester.
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