The Power In The Land. Fred Harrison
direct their policies in favour of supporting rental income.17 An historical example from the rural sector is the use to which the British Parliament put the Corn Laws. These imposed duties on imported wheat. By restricting international trade, domestic prices rose and ensured high land values and rental income. Adam Smith would presumably have approved of this policy, for it culminated in what he deemed to be ‘the greatest of all public advantages’ — even though the policy directly contradicted his strictures against trade protectionism. After 1815, and towards the end of the Corn Law period in the 1840s, the effect on consumers was serious; average prices were higher, and the extreme prices were occasionally very much higher, than they would have been if people had been free to eat foreign-grown wheat.18
The consequences were serious at the levels of both households and the economy. For example, the Commission on Hand-loom Weavers found evidence that the greatest grievance of the weavers was the price of food. As a result of the high proportion of their wages which they were forced to spend on food, ‘their power of purchasing clothes was curtailed, and the home demand for manufactures was checked’.19 A similar restrictive effect on international trade was felt. Potential customers in foreign lands could not buy goods made in Britain because they could not sell their wheat on the British market.
A contemporary example from the USA is the practice of funnelling federal government money to farmers as an inducement to set aside land and reduce the output of food. This keeps food prices high and retards the living standards of consumers (who would otherwise spend less on food, and more on durable goods). The value of land, moreover, is increased above its competitive market level, which is the ultimate effect of official policy.20
An identical effect on social welfare is achieved by the decisions made by individual land monopolists. An example from the urban sector neatly illustrates how speculation restricts economic growth.
Economists traditionally assume that the ceiling on output is set by the rate of growth of population, technical progress and the accumulation of capital; land monopoly is ignored as a brake on the economy. At a London meeting of the Underground Railway Group in February 1927, Lord Ashfield complained bitterly that the Edgware extension of the London Electric Railway had continued to develop its traffic ‘at a slower rate than was anticipated’. Why? He offered an explanation: land speculation at the Edgware terminal had forced up prices to a level which restricted purchases. ‘This is an evil which besets all railway enterprise,’ he declared, and he proposed as a remedy ‘some means by which the increment in the value of the land could be appropriated to pay some share of the enormous cost attending the construction of Underground Railways in Greater London’.
The following year, Lord Ashfield’s complaint was investigated by the Liberal Party’s Industrial Inquiry, the committee of which included Lloyd George and John Maynard Keynes. They reported:
Lord Ashfield’s suggestion applies not only to London and not only to railway undertakings. It applies to all major transport undertakings, and public improvements in every part of the country. The increase in land values might in some cases pay the whole cost of the development and in all cases a large part of it.21
This was a familiar story: public expenditure on improved transportation — to cut the costs of travel and extend the range of living and working environments — pushed up land values. This, in itself, is not a weakness of the economic system, provided that the price of land was not forced above the economic surplus — the real rental value of land proportionate to the current output of wealth. Under the present arrangements, however, not only are the socially-created increases in land values privately appropriated, but the monopolistic structure of the land market encourages speculators to force up their asking prices to speculative levels, consequently retarding the process of capital formation and economic growth.
The vital conclusions ought to be obvious, but they have been ignored. Where capitalists cut costs and increase efficiency, land monopolists serve their interests best by increasing costs and decreasing overall efficiency. Where capitalism raises consumer satisfaction by extending the range of goods and services at lower prices, land monopoly restricts the choice and raises prices. This outcome arises inevitably from the simple truth that the pursuit of speculative rents can reward the monopolists only by curtailing general welfare.
But vacant sites are not the only manifestation of a malfunctioning land market. Monopoly can produce economic inefficiency even when owners use their land. For monopoly enables landowners to conceal entrepreneurial inefficiency. If, for instance, the performance of a firm is inadequate to pay wages at the ruling rates, interest on capital investment and rent to land, the proprietors can delude themselves by foregoing the economic rent which they ought, as a bookkeeping exercise, to impute to themselves as land- owners. What usually happens is that they pay wages and interest, and disregard rental income. While this situation may be tolerable to the owner- occupying entrepreneurs, resources are not being used to their best advantage so far as the economy is concerned. Output, and therefore welfare, is not being maximised.
Assume that the firm is in a shrinking industry. Competing firms (which rent their land) have to close down or switch to producing goods or services which the consumers want, and for which they are willing to pay a price yielding sufficient returns to justify the employment of all the factors of production. The stark reality of this position can be hidden from the firm which owns its land. Their day of judgment is deferred. But as a result, firms which want to expand in new directions cannot use the land, labour and capital which are tied up in the redundant firm or industry: artificial shortages constrain the aggregate growth of the economy. The inefficient allocation of resources would be quickly terminated by the imposition of a land tax on market-imputed rental income. If a firm was unable to pay that tax and meet its wages bill and returns to capital, it would have to change to some other, more desirable and remunerative activity.
Without that tax, there is less inducement on the firm to make the quick adjustments which would raise general welfare. Very often the end for the ailing firms comes when a land speculator moves in and undertakes an ‘asset stripping’ operation. By shrewdly judging that the land is not being put to its best use, they buy the firm cheaply, terminate the loss-making side of the enterprise and cash-in on the capital value of the land.22
Such an operation can contribute usefully to the reallocation of resources. Is this not a justification for profits from land dealing ? No. Under the present fiscal regime, asset strippers often keep their new acquisitions idle in the certain expectation of future capital gains. And there is no reason why the desired transformations could not be engineered to everyone’s advantage except the speculator’s. A land tax which completely removed the private gains from land monopoly would induce the changed use of resources. This would result in higher wages and yields on capital (from the pursuit of more profitable lines of production), while simultaneously increasing public revenue from that portion of wealth that was socially created — economic rent.23
An examination of the history of Western industrial society will reveal that land monopoly — and not the acquisitive motives of the capitalists — is the constant internal (but not intrinsic) disruptive influence on the system. If the evidence does sustain this conclusion, we will begin to see the significance in the astonishing admission by Marx — which his disciples ignore — that capitalists play a worthwhile role in the creation of wealth:
The capitalist still performs an active function in the development of this surplus-value and surplus-product. But the landowner need only appropriate the growing share in the surplus-product and the surplus-value, without having contributed anything to this growth.