Great article. My only recommendation would be to explicitly link and reference Mason Gaffney. He wrote A LOT about why land is different from capital, and why assuming that it is just another form of capital will systematically blind economic analysis, in favour of landowners. Just a small shout-out and link, so people who want to go deeper can, and to show that your points aren’t drawn out of thin air, but backed by a long and well established line of economic reasoning.
I contemplated including a whole section drawing from Gaffney on how rent was recast by the early neoclassicals as something not specific to land (correct) and identifiable as the excess of price over opportunity cost as value of next-best use (incorrect). The practical effect of that effort, I gather, was to downplay the fact that the entire price of land is an economic rent, but it came at price of confusing future generations by hiding the special nature of land vis-a-vis produced goods and assets.
It'll have to wait for a future column!
My potted history goes something like this:
1. Classicals agree land prices are pure monopoly rent.
2. As cover for rent-seeking, early neoclassicals say land prices don't contain much rent.
3. As cover for rent-seeking, late neoclassicals say land prices contain too much rent, but this could somehow be magically fixed by policy changes which logic and experience show will increase, not decrease land prices..
You do a JV with another party that provides the on-site input costs. You offer a long lease (say 30 years) and let the tenant pay any input costs. You own it for decades and do nothing but sell it at a positive value to someone else prior to any input cots.
I'm not sure I can wrap my head around this. A lease is only worth the sum of the future expected cashflows less cost of capital. Somebody has to expect to pay the input costs on the land prior to the lease coming into existence and if they weren't allowed to spend any "input costs" the lease would be worthless.
In the same manner, surely the states were able to raise funds by selling land because the buyers had an expectation of putting the land to use (incurring input costs) and earning a return, not because the government was writing lines in a ledger.
In the 1800s there were squatters running sheep in many areas of Western NSW long before government surveyors arrived. (Their relationships with local indigenous people is quite a fascinating story). If I understand correctly, under your reasoning the value of this land was zero then the government surveyor arrived, drew up a Deposited Plan and created the land value out of thin air. I'm not sure the squatters would have agreed! - See Geoffrey Blainey's The Story of Australia's People, The Rise and Rise of a New Australia, Chapter 5 for a discussion of how rich the squatters were and of the conflict between squatters and selectors when public lands were put up for sale in the 1860s.
Happy to be corrected here but in the absence of expected return (which ultimately rests on "input costs") why would anybody buy (or lease) any piece of land?
Yes, it is the application of other inputs to land that produces value. But the value produced exceeds the cost of those inputs. The excess, or residual, is a return the landowner receives from ownership per se, not from the action of applying inputs.
The return to ownership per se has no input cost (except, perhaps, the private cost of enforcing exclusive title via the public legal system).
The location, type and quality of the land will determine the quantity of inputs and thus "value"
10Ha of pastoral land at Bourke
10Ha of land on the Darling Downs
10Ha of land underlain by coal in the Bowan basin
10Ha of land at Barrangaroo
A fixed input cost to these equivalent units of land will not generate equivalent value. So, while the return is, as you say, to the application of inputs, it is not possible to apply inputs equally for the same expected return and thus the land has varying "value".
Yes, and that varying excess return on inputs goes to the landowner.
This is true even if they don't pay for the inputs. E.g. You can partner with another business to pay for the inputs and share the gains. Very common in property development for a property owner to contribute the undeveloped land, have the partner pay for any inputs, and share in the profits.
I find it hilarious when "zoning-explains-everything" monomaniacs quote me this "opportunity cost argument" in a town where we have numerous examples of wealthy people buying empty, developable lots for high prices in order to have more open space around their existing houses. "A pretty vista for a rich family to look at" or "a buffer zone from neighborhood barking dogs" are all uses alternative to building housing for which many people will pay highly.
Inasmuch as wealthier people will pay more for these sorts of "goods", it represents another example of locational premium. Proximity to wealthy people implies a higher price for these alternative "aesthetic" uses.
Perhaps a simpler way of explaining why the farmland fallacy is the case is to say, "Imagine there was a vacant piece of unzoned land on Martin Place, and it was auctioned. Would the buyer put a farm on it?" The same would likely be true of any land in the Sydney basin.
One might also consider the days in the 1800s when parts of Australia were zoned for European pastoral use, and people could move onto land not already held by Europeans, and claim it's leasehold from the relevant colony's government. All the land in question wasn't taken over instantly, and some places were taken over before others. Factors like lack of year-round water, lack of established stock routes, lack of access to capital (and lack of a willingness to massacre people) got in prospective pastoralists' way.
Zoning isn't necessarily a factor that blocks housing supply to a particular individual looking for their own home. But it can be.
Great article. My only recommendation would be to explicitly link and reference Mason Gaffney. He wrote A LOT about why land is different from capital, and why assuming that it is just another form of capital will systematically blind economic analysis, in favour of landowners. Just a small shout-out and link, so people who want to go deeper can, and to show that your points aren’t drawn out of thin air, but backed by a long and well established line of economic reasoning.
The too-long-didn’t-read version: https://www.cooperative-individualism.org/gaffney-mason_land-as-a-distinctive-factor-of-production.pdf
Thanks Radu.
I contemplated including a whole section drawing from Gaffney on how rent was recast by the early neoclassicals as something not specific to land (correct) and identifiable as the excess of price over opportunity cost as value of next-best use (incorrect). The practical effect of that effort, I gather, was to downplay the fact that the entire price of land is an economic rent, but it came at price of confusing future generations by hiding the special nature of land vis-a-vis produced goods and assets.
It'll have to wait for a future column!
My potted history goes something like this:
1. Classicals agree land prices are pure monopoly rent.
2. As cover for rent-seeking, early neoclassicals say land prices don't contain much rent.
3. As cover for rent-seeking, late neoclassicals say land prices contain too much rent, but this could somehow be magically fixed by policy changes which logic and experience show will increase, not decrease land prices..
As somebody who comes from a farming family I found this statement interesting:
"This two-part answer arises because unlike goods, services, and many long-lived physical assets, land has unique characteristics:
......
it has no input cost of use (i.e. nothing was given up to create the opportunity to put land to a positive value use)."
Could you give as an example where land has been put to a positive value use without incurring any input costs?
You do a JV with another party that provides the on-site input costs. You offer a long lease (say 30 years) and let the tenant pay any input costs. You own it for decades and do nothing but sell it at a positive value to someone else prior to any input cots.
Australian states raised funds by selling land by writing in a notebook with no input costs. Where did that value come from? https://www.fresheconomicthinking.com/p/why-arent-land-titles-free?utm_source=publication-search
I'm not sure I can wrap my head around this. A lease is only worth the sum of the future expected cashflows less cost of capital. Somebody has to expect to pay the input costs on the land prior to the lease coming into existence and if they weren't allowed to spend any "input costs" the lease would be worthless.
In the same manner, surely the states were able to raise funds by selling land because the buyers had an expectation of putting the land to use (incurring input costs) and earning a return, not because the government was writing lines in a ledger.
In the 1800s there were squatters running sheep in many areas of Western NSW long before government surveyors arrived. (Their relationships with local indigenous people is quite a fascinating story). If I understand correctly, under your reasoning the value of this land was zero then the government surveyor arrived, drew up a Deposited Plan and created the land value out of thin air. I'm not sure the squatters would have agreed! - See Geoffrey Blainey's The Story of Australia's People, The Rise and Rise of a New Australia, Chapter 5 for a discussion of how rich the squatters were and of the conflict between squatters and selectors when public lands were put up for sale in the 1860s.
Happy to be corrected here but in the absence of expected return (which ultimately rests on "input costs") why would anybody buy (or lease) any piece of land?
Yes, it is the application of other inputs to land that produces value. But the value produced exceeds the cost of those inputs. The excess, or residual, is a return the landowner receives from ownership per se, not from the action of applying inputs.
The return to ownership per se has no input cost (except, perhaps, the private cost of enforcing exclusive title via the public legal system).
Is this a distinction without a difference?
The location, type and quality of the land will determine the quantity of inputs and thus "value"
10Ha of pastoral land at Bourke
10Ha of land on the Darling Downs
10Ha of land underlain by coal in the Bowan basin
10Ha of land at Barrangaroo
A fixed input cost to these equivalent units of land will not generate equivalent value. So, while the return is, as you say, to the application of inputs, it is not possible to apply inputs equally for the same expected return and thus the land has varying "value".
Yes, and that varying excess return on inputs goes to the landowner.
This is true even if they don't pay for the inputs. E.g. You can partner with another business to pay for the inputs and share the gains. Very common in property development for a property owner to contribute the undeveloped land, have the partner pay for any inputs, and share in the profits.
I find it hilarious when "zoning-explains-everything" monomaniacs quote me this "opportunity cost argument" in a town where we have numerous examples of wealthy people buying empty, developable lots for high prices in order to have more open space around their existing houses. "A pretty vista for a rich family to look at" or "a buffer zone from neighborhood barking dogs" are all uses alternative to building housing for which many people will pay highly.
Inasmuch as wealthier people will pay more for these sorts of "goods", it represents another example of locational premium. Proximity to wealthy people implies a higher price for these alternative "aesthetic" uses.
Perhaps a simpler way of explaining why the farmland fallacy is the case is to say, "Imagine there was a vacant piece of unzoned land on Martin Place, and it was auctioned. Would the buyer put a farm on it?" The same would likely be true of any land in the Sydney basin.
One might also consider the days in the 1800s when parts of Australia were zoned for European pastoral use, and people could move onto land not already held by Europeans, and claim it's leasehold from the relevant colony's government. All the land in question wasn't taken over instantly, and some places were taken over before others. Factors like lack of year-round water, lack of established stock routes, lack of access to capital (and lack of a willingness to massacre people) got in prospective pastoralists' way.
Zoning isn't necessarily a factor that blocks housing supply to a particular individual looking for their own home. But it can be.
Hmm, now we should apply this framework to valuing Bitcoin! :)