The Power In The Land. Fred Harrison
too low, or because wages are too high! And in both cases capital is said to be unable to adjust itself smoothly, and this results in dis-equilibrium.
There have been many theoretical attempts from the time of Marx to Keynes to explain why the modern industrial economy staggers from one recession to another with the predictability of the seasons. All the variables — trends in national income, consumption of durable goods, fresh formation of fixed capital, phases in the innovation of consumer goods and processes of production — have been scrutinized in the search for the cause of trade cycles. Most of these attempts are of a descriptive rather than explanatory character.
With the fall from popularity of the Keynesian doctrine — the tools of which failed to assist the politicians to prevent or even to ameliorate the recession which struck the capitalist West in the 1970s — there has been a hiatus in public policy formation. In desperation, there has been a fail-back to simplistic ‘solutions’ like the monetarism which found popularity in Britain in the early 1980s. These, however, have been attempts at sitting tight in the hope of happier days to come, relying on the principles of sound budgeting for individual households rather than for nations.
With one major exception, no-one has offered land speculation as the possible explanation for cyclical recessions. This hypothesis was advanced by Henry George. Land speculation, he said, was not the only cause of depressions; but it was ‘the great initiatory cause’.4
George was not satisfied with conventional ‘explanations’. How could it be, he wondered, that there was ‘under-consumption’ when people were hungry, poorly clothed, badly housed? They were willing to consume more — what stopped them? And how could it be that there was ‘over-production’ by capitalists who were supposed to be in search of profits? Supply might be larger than demand for a particular product at a given moment in time; but what stopped the entrepreneur from cutting his price, selling off his goods and smoothly moving into a more profitable field of activity?
George concluded that land monopoly was to blame. It operated at two different levels of intensity. Speculation caused depressions by enabling people to demand prices which were extraordinarily high: effectively, the monopolists demanded a part of tomorrow's output today. The effect of this is to milk the returns to capital and/or labour. But this can only be tolerated up to a point, beyond which it becomes uneconomic to employ either capital or labour; unemployment ensues. Secondly, land monopoly enables speculators to hold land idle in the expectation of future capital gains. This is the wait-and-see strategy. As a result, scarce land is withheld from production in itself preventing new employment — and as a consequence of the contraction in supply, this pushes up the level of rents of land in use. This has the effect of bankrupting some firms which would otherwise be profitable and competitive.
Production [wrote Henry George] therefore, begins to stop. Not that there is necessarily or even probably, an absolute diminution in production; but that there is what in a progressive community would be equivalent to an absolute diminution of production in a stationary community — a failure in production to increase proportionately, owing to the failure of new increments of labour and capital to find employment at the accustomed rates.5
This produces ‘a partial disjointing of production and exchange’, which manifests itself in apparent over-production and under-consumption. A decline in output continues until one or a combination of three things happens:
(1) the speculative advance in rents terminates;
(2) an increase in the efficiency of capital and/or labour results in an increase of income and a readjustment of the distribution in relative shares going to the factors of production; or
(3) labour and capital reconcile themselves to lower returns in wages and interest.
Henry George provided an account of how recessions cause the collapse of banks, the bankruptcy of firms and the panic of speculators who find that they have to finance loans at high interest rates for land which is suddenly seen to be over-valued. He used largely impressionistic evidence to support his theory. For this he cannot be criticised, for it is only in recent years that statisticians have produced data in anything like sufficient quantity and quality to enable us to elaborate the theory in a scientific manner.
Our first problem concerns periodicity. The waves in the trade cycle move in regular sequences. The shortest, terminating every four or five years, is the one which concerns democratic politicians most. They feel obliged to keep wary eyes on the economic indices in case these predict unfavourable events coinciding with election time. The most important cycle is of 20-year duration. The cyclical trends in the movement of phenomena like population, migration, immigration and house building were first fully elaborated by Simon Kuznets for the USA.6 The importance of these long cycles is that they terminate in slumps, the amplitudes of which are greater than those experienced during the course of the upswing of the cycle. This is because inventory investment and other volatile forms of investment coincide with a downturn in the building programme, thereby creating a severe recession.7 But Kuznets has admitted that, while there is no difficulty in identifying the long swings, there is a problem in explaining them.8 He had to content himself largely with describing the phenomena.
Does the land speculation hypothesis fit into the 20-year cycle? In the 1930s Homer Hoyt, then a post-graduate student at the University of Chicago, investigated the trends in land values in Chicago over the remarkably long period of 100 years. He discovered a regular cycle of 18-year duration.9 His data is considered to represent the general trend in real estate values in the USA over the period up to the 1930s.10 Hoyt has since up-dated his material, and his results are listed in Table 5:I. They fit neatly into the sequence of business cycles. A peak in land values is missing. Its absence may be explained by the threat and advent of the world war, which disturbed the benign psychological outlook which is necessary for speculation. Consequently, the peak of this cycle was eliminated.11
But what if the trends in land values were simply a response to other variables in the economy? We expect to see a rise in land values, for as national income increases, so does the surplus, or economic rents. Rising land values, then, are a derived phenomenon. So how can we justifiably ascribe the primary power to cause recessions to the land market, the income for which is itself dependent upon the functioning of the labour and capital markets ? Is it not possible that a downturn in national income then results in a drop in land values ? This is the popular view: the causal forces are held to be in the opposite direction to the one postulated by Henry George. To prove a causal connection working from land speculation to the wider economy, we need to trace more than ‘a fairly close correspondence’12 between movements in the real estate market and phenomena like the building cycle.
TABLE 5:I
USA 1818-1929
Sources: 1 Homer Hoyt, ‘The Urban Real Estate Cycle - Performances and Prospects’, in Urban Land Institute Technical Bulletin No. 38, 1950, p. 7. 2 G. Shirk, ‘The 18?-Year Cycle in Total Construction’, Cycles, August 1981, p. 149, Figure 1, and C.A. Dauten and L. M. Valentine, Business Cycles and Forecasting, Ohio: South-Western Publishing Co., 1974, p.277. For the booms of the 1830s and 1850s, see also G. F. Warren and F. A. Pearson, World Prices and the Building industry, 1937, p. 99.
The timings favour Henry George’s hypothesis.