The Economist: Fortunes are from Land or Capital?
|February 5, 2014||Posted by Staff under Editorials|
This 2014 excerpt of The Economist on inequality, Feb 4, is by R.A.
For a book that hasn’t even been published in English yet, Thomas Piketty’s “Capital in the Twenty-first Century” [in French] has prompted quite a lot of discussion.
The resurgence in capital is driven almost exclusively by a rise in housing values, and those values stem almost entirely from what classical economists would have termed land.
If you wish to be doing business at a certain level in France then you must live in or around Paris. Many wish to experience the legendary culture and beauty of the city and to live in proximity with others who value it. Paris maintains the latter demand in large part by severe restrictions on the height and architecture of buildings within the city.
Those restrictions preserve the history of Paris, but also make it impossible for it to house all of the millions who would come today to live and work in the legislative, financial, and commercial capital of France. The result is that only those willing and able to pay the highest rents or mortgages can live in Paris and the rest are pushed to the suburbs.
This increase in rents and housing prices is properly accounted for as a land value, not a capital value. Soaring housing costs are different from those for soaring returns to financial capital.
In Britain the recent rise in the capital-income ratio is about two-thirds attributable to housing and one-third attributable to other domestic capital. In America growth in other domestic capital is actually more important than growth in housing.
Building restrictions generate soaring asset prices only because there is an extraordinary level of demand for that land. Demand for that land is not really associated with any inherent productivity of the land; the land is only productive because of its proximity to concentrations of economic activity.
Ed. Notes: Funny that even business people need to be reminded that the three most important things in real estate — location, location, location — are also the most important thing in economic growth, in buildings fortunes, and in the business cycle. Efficient land use not only cuts costs but also enables the spontaneous networks that incite new ways of generating wealth. And land speculation is what causes the boom-bust cycle that ultimately topples into recession. Maybe business people should be reading these pages here more often!