Land Value, An In-Depth Treatment
Ground Rent and Land Value
Here is the final part of a three-installment exploration by David H. Chester, on the topic of land values and their economic characteristics.
Part One Part Two
by David H. Chester
3. The Comparison Between Ground-Rent and the Return on CapitalWhen an investor purchases an area of land with buildings/installations that are intended for use in a productive, commercial or domestic economic role, he does so as if it were a single item of capital. However some confusion can arise, when he determines the value of the land together with the various possible installed industrial plants, manufacturing facilities, shops, offices, restaurants, residences, etc. Although he treats them as one, as seen above their values actually arise from different causes. In addition to the economic ground-rent, the monetary return (or hire-fees, that are demanded of the tenant) for the use of the various kinds of durable capital goods, will appear to our investor/capitalist to be a part of the total annual effective utility income of the property.
So far in our analysis, only the land-value itself has been considered, without the value of the capital invested in buildings and installations. But because the land is often treated as if it were capital, it is easy to omit this essential difference. Due to this oversight, many writers in macroeconomics imply that capital in the form of land is no different from the capital invested in durable goods. They fail to recognize the fact that the value of the land does not originate from the exertion of direct labor on it and consequently that it is not really capital at all. Nor do they admit, when the macro-economy is modeled for purposes of dynamic analysis, that the different behavior of these two entities must be properly represented. A comparison of the two is therefore presented in Table 3, showing the differences in their behaviors.
Unlike every other item of manufactured goods on which work must first be performed in order to impart worth, it is not due to this measure that the basic value of land is created. (Although in an exceptional case described in Section 2.4, increases in the land-value occur after the utility is raised by directly working certain poor kinds of agricultural land.) Fluctuations in the maximum ground-rent that normally can be charged, result in variation of the land-values, but these do not necessarily parallel the gain from and value of the equivalent sums used for capital investment in durable goods.
The reason for this general disparity between land and capital is due to the history of the land tenure within the country. Not every nation takes the same attitude to land ownership. For example, in Australia the Aboriginal natives envisage themselves as living in respectful partnership with the land, as if they were its common heritage (rather than the reverse, which they find and understand to be of less significance!).
TABLE 3 COMPARISON BETWEEN THE MACRO-ECONOMIC PROPERTIES OF LAND AND ALL NATURAL RESOURCES, WITH CAPITAL INVESTED AS DURABLE GOODS IN PRODUCTION FACILITIES MACRO-ECONOMIC PROPERTY LAND AND NATURAL RESOURCES CAPITAL DURABLE GOODS (PRODUCTION FACILITIES) 1. EXISTENCE DUE TO: Creation or Gift of Nature. Human exertion (labor). 2. POSSESSION BY: Land-Lord. Capitalist (shareholder). 3. ECONOMIC ADVANTAGE: Access/property rights (for unspecified use). Use of the faculty (for a dedicated purpose). 4. ECONOMIC ANNUAL RETURN FOR THE USE OF ITS UTILITY: The Ground-Rent, (not all of which goes to the land- lord, because without this advantage it tends to drive industry away from the populated regions). Dividend = Annual value of produce
– Ground-Rent – Wages
– (Depreciation and Maintenance of the facilities).
(The first three terms on the right-hand side of the equation comprise the yield.)
5. EFFECTIVE VALUE DUE TO:
a) Supply (cost).
Natural bounty remaining, together with the ease of communication to the centers of population. Costs of the facilities' manufacture and installation = Build-Time x (Rent + Wages + Hire of Tools etc.) + Assigned Durable Capital Goods. b) Demand (price). "Capitalized" Ground-Rent =
Productive capacity of the facility, when it is used efficiently in its dedicated role for many years. 6. DYNAMIC EFFECTS:
a) Use. The scarcity of raw materials, loss in fertility, quality, corrosion and wear.
Reduced value, eventually followed by a changed land status and its speculative rise due to line 6b) below. None, since depreciation causes and is deliberately allowed to reduce the value, with a tendency for production to move elsewhere after a long time. b) Increase in the surrounding population-density. Increased value, due to local developments improving the ease of communication. Reduced value, due to need to invest in greater control of damage done to the environment and the resulting rise in production costs. c) Greater "prime-rate" and the general rate of interest on all kinds of investment. Reduced value due to capitalization formula, in line 5b) above. Slightly increased value, due to trend for yield to equilibrate with dividend and prime-rates, because of "sensible" stock-market effects. d) Greater extent of monopolization of the resource or facility. (i) Increased value, from speculative price rise,
(ii) exaggerated ground- rent and the resulting unemployment, from smaller opportunities for labor to be worthwhile
(iii) greater urban sprawl, due to rise in values and the public-funded development of access to more-remote sites.
(i) Temporary increased value, from price speculation in the stock-market, followed by a drop in value,
(ii) increased local unemployment, due to the raised (and reduced competitive) price of the product, causing a smaller demand,
(iii) tendency for the consumer to substitute an alternative kind of goods to satisfy his needs.
e) Long-term source of funds for investment. Trade in speculative price. Unknowing use of ground-rent, by the land-lords who act as capitalists here.
4. SUMMARY AND CONCLUSIONS
a) The exchange-value of a site is determined on the free-market. This value depends on the use to which the site can be put. These prospects fall into various categories, for the production of goods and services, commerce, residence, recreation, military and government. They lay within rural, urban or national (public) land classifications, see Table 1. The status of each site changes with time, see item g) below.
b) The opportunity offered by the land for its utility, is created by a combination of its natural resources and its proximity to the centers of population. These two kinds of factors are listed in Tables 2a and 2b. Both of them are needed for the utility to exist, the amount of which is found when they are combined (or multiplied together).
c) The ground-rent of the site is the regular sum that the land-using tenant is willing to pay, for the right of access for optimum use. Consequently, ground-rent is also the excess product (or greatest enjoyment, in the case of residential land), over that offered by the least useful (or marginal) land. This is Ricardo's Rule of Rent (Ricardo, David, "Principles of Political Economy and Taxation", London, 1817). Ground-rent is the practical measure of the amount of utility that is above this margin.
d) Land in productive, commercial or residential use has a value that can be found by dividing the annual ground-rent by the dividend rate on shares in a business concern. This rate is also the average yearly return on capital investments in durable goods, after deducting the cost of maintenance and depreciation.
e) Providing that its status is unchanged, the value of public land is indeterminate and of no significance to the macro-economy.
f) The value of the land should not be confused with the value of the invested durable capital goods, which are installed on it. The generation of the ground-rent from the land is by a different process than that of the hire-fees obtained from using these durables. (There are a few minor exceptions to the land-value being independent of capital investment, nevertheless in general this is true.)
g) When the status of an area of land is expected to improve, there is a strong tendency for speculators to take advantage by purchasing it and then restricting its use. The resulting monopolization limits the amount of land available and it inflates the amount of ground-rent that tenants of the other sites must pay. This makes it more costly to produce goods, reducing the extent of their consumption and increasing the degree of poverty. In addition, the effect of the land speculation is to drive production, commerce and residence to the marginal regions, to worsen urban sprawl and to increase unemployment, see Table 3. This causes the phenomenon of stagflation.
h) After due consideration is given to the value of the land, a picture emerges of a natural phenomenon that behaves according to certain rules that are similar to the laws of physics. Hence, this aspect of macroeconomics is scientific.
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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