Awesome! I did not realize The Land Trap focused on China. I think a lot of people I know would be willing to read either that book or this article, given its focus on China. Thanks, Lars.
Have you heard that in some (probably growing number) of countries banks have assisted the shift of land title deeds from linen backed cotton rag paper to ephemeral digital records. In South Africa and Australia and possibly Finland (countries I have some connection with) banks will not give you a loan on a property unless you lodge the title deed with them, yet when you pay off a mortgage they are disinclined to return your title deed and instead offer you a printout from a deeds register they are happy to support.
Now when the inevitable hack occurs and the digital deeds register is compromised the banks will claim ownership of all land and demand petitioners to pay to resolve issues because there is no longer a reliable paper trail. This has happened sporadically already and banks that held loans that had only some cents left on the account have not been able to close the loan because they have misplaced the deeds.
Land should be a special case of value. Owned by the citizens of a country and the balance held in trust by the state as a steward. Citizens have a deemed right to freehold on a parcel of land sufficient to eek out a living and can lease more or exchange their parcel as they choose. All other petitioners should be leasing from the trust and the income is directed to the "Adult Resident Citizen Dividend" (ARCD) that is similar to a UNCONDITIONAL Basic Income where all the countries income (duties, levies, mineral, energy, hydrological, intellectual, forest, property income) is distributed to the ARC first and then flat rate personal and corporate tax is used to fund the budget. This means everything that country earns is shared and everyone who profits from the country pays.
Excellent review! I particularly liked your emphasis on the distinction between land selling prices and rental values when discussing Hong Kong vs Singapore. Whilst reading this section in the book I was confused for a bit because I would have assumed that tax revenues based on land values should align incentives correctly - but it seems as if you’re saying, only if it’s rental values rather than selling price.
I enjoyed the global historical perspective Bird takes and had only few quibbles come to mind:
1. Bird mentions Thailand as a positive example of formalising land rights in the 1970s/1980s, but misses out on the land bubble in the late 90s and its effect on the Asian Financial Crises, and also subsequent reform (my understanding from speaking to landowners in Bangkok is that banks now require that loans against land must come with development plans to be executed in a specific amount of time, and that home ownership in Thailand is high).
2. Bird mentions the intellectual “downfall” of George’s ideas, including criticism from Alfred Marshall, but doesn’t mention that Marshall was working after John Bates Clark, who (if Mason Gaffney and Fred Harrison are to be believed in “The Corruption of Economics”) had a significant hand in arguing that land can be treated like other forms of capital.
3. Bird mentions the link between credit and land, and gestures to planning in the UK, but could have signposted the work of Josh Ryan-Collins (author of “Why can’t you afford a home?” and “Rethinking the economics of land and housing”, and academic papers), who explores the link in much more depth than I’ve seen anywhere else.
> I would have assumed that tax revenues based on land values should align incentives correctly - but it seems as if you’re saying, only if it’s rental values rather than selling price.
Well, I think what Bird is saying is that there really wasn't much recurring real estate tax -- land value or otherwise -- in Hong Kong at all.
What I was getting at is that Georgists often say that an ideal state should seek to "increase land values" and fund themselves thereby -- and Hong Kong would seem to be a disastrous counterexample. They certainly "increased land values", they made it their funding model, and it seems really bad!
But really what is meant by "increase land values" is to increase land *productivity* -- to make sure land is put to its highest and best use. When this is done the recurring rental value increases (and therefore also the capitalized land selling price). LVT captures this, public investment further increases land productivity, which is captured by LVT and spent on more public investment.
However, it's possible to jack up the land *selling price* by artificial means without actually increasing the productive use of land, and when this happens you tend to see price to rent ratios get really out of whack, and from what I can tell Bird is saying this is what happened in Hong Kong.
Skyscrapers are an obvious example of using land more productively, and Hong Kong sure has a lot of them, so at first glance I wouldn’t expect the efficient use of land to be much of a problem there. What evidence is there for the inefficient use of land in Hong Kong?
Perhaps the government doesn’t extract enough rent, but that seems like a different issue.
This is totally out of left field, so feel free to tell me if I'm completely bonkers.
When I explain Georgism to people, one of the questions they ask that I don't really have a good answer to is "how do we determine the capitalization rate that should be used to derive the periodic LVT from the value of land?" I don't have a good answer other than the one you give in your Georgism series: you use the prevailing rate in the area. More broadly, I'm curious how *anyone* decides on a desired cap rate on land (other than "getting my money quicker is better").
When I consider how the Fed works, one of the questions I have is "how do we determine the interest rate that should be used?" I don't have a satisfying answer other than: the Fed reacts to a wide range of economic and political factors and ultimately it's kind of an art more than strictly a science.
If fiat currency is backed by a country's land value, which is itself the result of real productivity, and loans against that land are one of the big ways in which money makes it from the Fed into the economy, which are used (ideally) to boost said productivity...is the aggregate cap rate on land (or the desired LVT cap rate) somehow related to the "ideal" federal interest rate? Both of them seem like ways to adjust the rate at which real underlying value gets converted into a form that's useful to the economy. Does that make any sense at all?
I’ve been researching this topic for an article and I’m struggling with the alternating use of “sell” and “lease” both in this book and others. I understand that Singapore land leases work like a sale (as in, the buyer takes out a loan to pay for the lease and then has a mortgage on it), but are actually a lease (what they are buying is a 99, 40, or 20 year lease, whatever is left on it!)
In the case of Hong Kong and China though, if I am understanding this correctly, they actually *sold* off a bunch of their land rather than lease it in order to raise short term money while shooting themselves in the foot to the long term earning potential of that land via leases. Is this correct?
This was interesting but there seems to be a fatal flaw in this part of the logic:
"In a rising real estate market, however, investors feel it’s safer and better to buy land and wait for it to go up in value. This not only bids up the price of land, but also sucks capital out of the actually productive part of the economy. That lost investment could have paid for tools, materials, research, and workers. Instead, it just inflates the price of land."
How does it "suck capital out" the rest of the economy? Every land purchase is also a land sale, the purchase price is also a sale price. There is no money that "goes into" land. The buyer has less cash, but the seller has more cash. Presumably the seller (who must have had the opposite view to the buyer in terms of its price potential) can invest in the productive part of the economy?
So, it's true that "money doesn't get deleted" when it changes hands, but your premise, as stated, could be said about any other kind of investment. Taken to its natural conclusion, this would seem to imply that there is no such thing as malinvestment, and that any allocation of capital must be socially neutral because the money always ends up somewhere else?
My point actually only really relates to land, or other assets/investments that are in fixed supply. It's actually the very fact of its efficiency of a tax base (cannot change the amount of land) that makes malinvestment in land impossible.
It is possible to build (say) too many datacentres. That happens because people use money to get others to spend their labour (construction labourers) or materials (steel, concrete, etc.) to assemble a datacentre. If slowing AI demand or whatever means that this does not earn its cost of capital, there is malinvestment. The wasted resource is the time, effort, and raw materials used to assemble a datacentre.
But that is not true for "malinvestment" in land. No extra resources are diverted to creating the land - it was there already.
For the avoidance of doubt, I guess a land bubble could create some forms of malinvestment, but these are all the ancillary services like real estate agents, bank managers etc. The actual land itself is perfectly inelastically supplied - there can be no wasted resources in creating more of it.
This is a point that I think Schneeaffe was making in his comment when he said: "How does this work? With normal investments, like when Im buying a machine, I pay to divert labor to build my machine. Obviously investments like that can crowd each other out. But when I invest in land, nothing needs to be done."
Thanks for clarifying. If you don't mind, it would help me better understand your position if I could ask this -- what is your understanding about what happened with the infamous Japanese Land bubble and its subsequent decades-long fallout? How do those events inform exactly what you mean here by "malinvestment in land is impossible"?
I'm no expert on the Japanese land bubble, though I've looked at it before. I knew of the NZ government sale of the tennis-court-sized plot for a huge sum (I'm an economist in New Zealand). The first and most direct fallout would be wealth transfer: if a Japanese buyer paid a massive premium to a foreign seller for land that subsequently crashed in value, that's a straightforward loss for Japan and gain for New Zealand.
But I think the main damage from the Japanese bubble operated through the banking system. Banks lent to buyers who purchased from sellers. Net sellers during the runup were enriched; banks were left holding loans backed by collateral worth far less than the principal. When the bubble burst, the banking system became dysfunctional for years. Richard Koo's work on "balance sheet recessions" documents this mechanism well.
So the land bubble didn't cause overinvestment in land (which I maintain is impossible, since no resources are consumed in creating more of it). Rather, it functionally destroyed the credit market. That's terrible,and might well call for all the Georgist solutions you and Bird advocate, but it's a different mechanism than "capital sucked out of productive investment."
The secondary problem was genuine malinvestment, but in structures rather than land. Skyscrapers make sense when land is extremely valuable; less so otherwise. The inflated land prices sent false signals to the construction industry, inducing overbuilding. Real steel, concrete, and labour were wasted on buildings that didn't justify their cost.
I'd also concede that speculative churn consumes real resources in transaction costs: lawyers, agents, loan officers, appraisers. If a bubble increases turnover, more labour gets absorbed into facilitating what are ultimately zero-sum transfers.
To be clear, none of this necessarily undermines the case for land value capture policies, but I see the "overinvestment in land" story in NZ all the time and when questioned people do seem to have some sort of view that the money gets sucked into the land somehow.
Okay, I see what you're talking about here. It may very well be the case that we actually agree on most or even all of the substance, and this mostly amounts to a semantic argument?
That said, we should all strive to be semantically correct, because it is technically correct, the best kind of correct.
What you here call "functionally destroying the credit market" is what I really mean by "capital sucked out of productive investment." That, along with the secondary problem in misallocating *what ought to be built* and *where*, in terms of actual material things in the world.
RE: "money gets sucked into the land somehow."
Maybe part of the confusion is both of us being slightly imprecise about whether we're talking about *money* or *actual physical wealth in the world*. It looks like I certainly made this mistake that when I casually tossed around the word "capital" above, by which I really mean credit, which is not quite the same thing, even after I went to great lengths back in the day to differentiate such terms:
Thanks for engaging on this - it's made my thinking clearer.
I think we are probably converging, but I do think the distinction between "capital sucked out during the bubble" and "credit market destroyed by the crash" points to different timing and mechanisms:
The "sucked out" framing implies ongoing harm while the bubble inflates: resources continuously diverted to unproductive ends. Under this view, the bubble itself is the problem.
The balance sheet/credit framing means the primary harm is collapse and its aftermath: banks left holding impaired assets, unable to lend, triggering extended and painful deleveraging. Under this view, the bubble is mostly redistributive while inflating (enriching early sellers at the expense of late buyers), and the damage is all through the financial sector when it bursts.
On money versus physical wealth: yes, I think that's where some of the imprecision creeps in. Credit creation and destruction seem to me to be thee problem, not flows of pre-existing money or physical resources. Does this matter? Well, I think most malinvestment would create significant problems even if 100% equity financed (e.g. someone builds way too many datacentres and then AI demand doesn't show up), but if what I'm saying is correct, land bubbles that were 100% equity financed (maybe impossible, sure), would not actually destroy resources.
Being an 83 years old man, I can't honestly say I understand the argument you are here, but I do understand George's original case for capturing the unearned increment caused by urban development. In fact I recommend that approach in the new country towns (actually "garden cities") I propose in my manifesto, A Part-time Job in the Country: Notes Toward a New Way of Life in America. You and some of your readers might be interested. Here is a link: https://www.amazon.com/dp/B00U0C9HKW
This is a really interesting idea. I’m actually writing about the garden cities movement now, and my husband works in manufacturing in both the US and Europe.
In the US factory work is already contract and rural, but there are a lot of downsides to that (factories are usually in the middle of nowhere and workers are staying in isolated trailers for their multi-month contract). Europe is better (factories are in the city and workers can live a normal life, factories even recycle heat into the cities etc) but both struggle to find workers and don’t need as many now that factories are so automated.
The garden city movement was a very good one, and could definitely be revived for our times, but it might be less geared around factory work?
Hi Elle! Thanks for your comment. It is, granted. a very difficult problem to solve as it requires a coordinated move of both labor and capital to a heretofore relatively undeveloped location. I hope you read A Part-time Job in the Country to see how I propose solving that problem. You'll see why a machine in the garden (i.e., factories in the countryside that run on part-time jobs) are a necessary part of the solution. They serve to anchor the new country towns, which can grow from there into true garden cities. Thanks again.
It seems like this could be explained a bit better? As I understand it, this can be unpacked as:
- Banks create money. Today, most money is in the form of bank deposits.
- Banks own mortgages and real estate loans. (among other financial assets)
- Mortgages use land (and buildings) as collateral.
So, perhaps it would be better to say that fiat currencies are *partially* backed by land?
If you own a house, you could create money by taking out a home equity loan. But then again, you could do the same with a credit card, which is an unsecured loan.
It’s a good trick, but creating money (by borrowing it) isn’t free.
But what if I reject Ricardo's Law of Rent as being overly simplistic? While the core logic works for econ 1, the simplifying assumptions seem to be better suited to the 1890s than the 2020s. Today, human capital and technology dwarf raw land in importance. Further, government regulations like zoning are directly responsible for most of what looks like scarcity today. If I were an economist i might quip: land is not destiny, bad policy is destiny. You should fix the regulatory restrictions before you redesign the system to accomodate bad policy.
How does this work? With normal investments, like when Im buying a machine, I pay to divert labor to build my machine. Obviously investments like that can crowd each other out. But when I invest in land, nothing needs to be done.
In a couple of ways. First, there's the trivial sense in that money that is spent investing in land could have been spent on anything else, and wasn't.
The more important thing, however, is that if I invest in land just to sit on it, I'm taking up a piece of land that someone else--such as someone with an actual business plan to work the site--could have bought instead. Further, the money I invested bids up the price. So someone with an actual business plan now has to pay more to acquire land, which leaves them with less money left over for the actual business part of their plan. That's less money that's available to pay for tools, machines, research, and workers.
But thats just monetary, nothing real has been consumed. Whatever I would have bought with that money otherwise is bid up in price slightly less, and this slightly increases the value of money, to exactly balance out the "lost" money.
>if I invest in land just to sit on it, I'm taking up a piece of land that someone else could have bought instead.
Yes, thats another thing I wanted to ask about. The only way you make a profit on the speculation if you can sell to someone who is willing to pay more than you payed plus interest, which mean hes also willing to pay more than the other entrepreneur Ive priced out plus interest. Normally, this means he has a use for it thats more valuable than that of the other guy plus the fallow time, and things were made better by waiting for him. Why doesnt this apply here?
> But thats just monetary, nothing real has been consumed.
To own land is to have the right to exclude others from its use. Literally every piece of economic activity requires access to land, and when the best land is held and kept out of use, it pushes those activities onto less productive land. This is the force that drives suburban sprawl, for instance. This in turn causes many actual real resources (besides land) to be consumed and used up that would not otherwise have been, because the more efficient production that could have been performed on the prime land is now pushed out to the more marginal land. As a simple example, when high density housing is not built on prime downtown land right next to productive job centers, housing gets built on the edges of the city, and this leads to more time spent commuting, which consumes both time and resources that would not have been spent if that housing had been built in the city center on a prime located lot, rather than having it sit fallow as a parking lot.
> Normally, this means he has a use for it thats more valuable than that of the other guy plus the fallow time, and things were made better by waiting for him. Why doesnt this apply here?
Because land is necessary for all economic activities, owning the best located land gives you unique leverage over the economy. Speculating on land is a bet that the location you own it in will increase in population/productivity over time. This increase in population and productivity is provided by your neighbors, not by you, especially if you are not building anything on your land but just letting it sit there. Nevertheless, this increase in population and productivity will cause demand for your land to rise. You can also get in a situation where people (falsely) believe that Land must always rise in value, so you can hold out simply because of speculative mania. This has happened multiple times in East Asia, for instance, with devastating long term consequences when the bubble finally bursts and prices reset to what actual productive activities can return.
Of course, if your city goes into decline, you will have made a bad bet and you will lose money. My argument is not that land speculation is a guaranteed way to make money, but that it is bad for the overall well being of the economy.
Ad 1), I think youre just describing the consequences of 2).
Ad 2, I agree that land bubbles are bad, and theres a reasonable argument that land is more likely to get them, but the problems described here are just the problems of malinvestment in a bubble, which are the same regardless of what asset is bubbling.
I'm curious, maybe you can expand on your position so I can help understand where you're coming from. Are you asserting that land is in principle no different than any other kind of asset, or are you making a different argument? Whether or not we reach an agreement I'd like to at least come to understand the crux of where we might disagree.
No, and in fact my initial argument against investment outcrowding does use one of its special characteristics, not being produced in response to demand.
Im saying that while youve *mentioned* special characteristics of land, you havent connected them to the bad outcomes you described. For example:
>This increase in population and productivity is provided by your neighbors, not by you
This is true of many speculations. For example, say I expect some new research using cerium to turn out great, and I buy and stockpile cerium, and then when it works out and the price of cerium rises and I sell. The value of the cerium was increased by the work of the researchers, not mine - yet, I have provided a valuable service. I made sure there would be a lot of cerium available for this new, higher-value use, rather than being used for something lesser beforehand.
This factum, and the remainder of this point, are unconnected to the special characteristics, even though you start out saying "land is necessary for all economic activities".
Indeed. Land reform is a great short term solution, but not a long term one, and just having land leases doesn't solve the problem if you don't actually collect land rent. As long as land rent flows to private hands, land speculation can still run free even if the state "owns" all the land.
Also, the thing about 99-year leases is that there's a real question about whether they will actually devolve when their time is up. When your leases are so long and your country is so young, it's worth thinking about what the pressures to just hand them over will be like.
Y'know, you're really good at reviewing books. Would be great if you did that more.
Awesome! I did not realize The Land Trap focused on China. I think a lot of people I know would be willing to read either that book or this article, given its focus on China. Thanks, Lars.
Thanks! The *entire* book isn't about China, but China gets a lot of discussion and itself forms the apotheosis of the book's conclusion.
See Anne Haila: Urban Land Rent, Singapore as a Property State.
Very interesting reading.
Have you heard that in some (probably growing number) of countries banks have assisted the shift of land title deeds from linen backed cotton rag paper to ephemeral digital records. In South Africa and Australia and possibly Finland (countries I have some connection with) banks will not give you a loan on a property unless you lodge the title deed with them, yet when you pay off a mortgage they are disinclined to return your title deed and instead offer you a printout from a deeds register they are happy to support.
Now when the inevitable hack occurs and the digital deeds register is compromised the banks will claim ownership of all land and demand petitioners to pay to resolve issues because there is no longer a reliable paper trail. This has happened sporadically already and banks that held loans that had only some cents left on the account have not been able to close the loan because they have misplaced the deeds.
Land should be a special case of value. Owned by the citizens of a country and the balance held in trust by the state as a steward. Citizens have a deemed right to freehold on a parcel of land sufficient to eek out a living and can lease more or exchange their parcel as they choose. All other petitioners should be leasing from the trust and the income is directed to the "Adult Resident Citizen Dividend" (ARCD) that is similar to a UNCONDITIONAL Basic Income where all the countries income (duties, levies, mineral, energy, hydrological, intellectual, forest, property income) is distributed to the ARC first and then flat rate personal and corporate tax is used to fund the budget. This means everything that country earns is shared and everyone who profits from the country pays.
This is such a great review. Is it still worth it to read these books? Feels like you covered everything here.
There's a lot of detail I've skipped over, so I definitely recommend reading the book itself.
Excellent review! I particularly liked your emphasis on the distinction between land selling prices and rental values when discussing Hong Kong vs Singapore. Whilst reading this section in the book I was confused for a bit because I would have assumed that tax revenues based on land values should align incentives correctly - but it seems as if you’re saying, only if it’s rental values rather than selling price.
I enjoyed the global historical perspective Bird takes and had only few quibbles come to mind:
1. Bird mentions Thailand as a positive example of formalising land rights in the 1970s/1980s, but misses out on the land bubble in the late 90s and its effect on the Asian Financial Crises, and also subsequent reform (my understanding from speaking to landowners in Bangkok is that banks now require that loans against land must come with development plans to be executed in a specific amount of time, and that home ownership in Thailand is high).
2. Bird mentions the intellectual “downfall” of George’s ideas, including criticism from Alfred Marshall, but doesn’t mention that Marshall was working after John Bates Clark, who (if Mason Gaffney and Fred Harrison are to be believed in “The Corruption of Economics”) had a significant hand in arguing that land can be treated like other forms of capital.
3. Bird mentions the link between credit and land, and gestures to planning in the UK, but could have signposted the work of Josh Ryan-Collins (author of “Why can’t you afford a home?” and “Rethinking the economics of land and housing”, and academic papers), who explores the link in much more depth than I’ve seen anywhere else.
> I would have assumed that tax revenues based on land values should align incentives correctly - but it seems as if you’re saying, only if it’s rental values rather than selling price.
Well, I think what Bird is saying is that there really wasn't much recurring real estate tax -- land value or otherwise -- in Hong Kong at all.
What I was getting at is that Georgists often say that an ideal state should seek to "increase land values" and fund themselves thereby -- and Hong Kong would seem to be a disastrous counterexample. They certainly "increased land values", they made it their funding model, and it seems really bad!
But really what is meant by "increase land values" is to increase land *productivity* -- to make sure land is put to its highest and best use. When this is done the recurring rental value increases (and therefore also the capitalized land selling price). LVT captures this, public investment further increases land productivity, which is captured by LVT and spent on more public investment.
However, it's possible to jack up the land *selling price* by artificial means without actually increasing the productive use of land, and when this happens you tend to see price to rent ratios get really out of whack, and from what I can tell Bird is saying this is what happened in Hong Kong.
Does that make sense?
Skyscrapers are an obvious example of using land more productively, and Hong Kong sure has a lot of them, so at first glance I wouldn’t expect the efficient use of land to be much of a problem there. What evidence is there for the inefficient use of land in Hong Kong?
Perhaps the government doesn’t extract enough rent, but that seems like a different issue.
It's criminal to make the US edition so much more ugly than the UK.
This is totally out of left field, so feel free to tell me if I'm completely bonkers.
When I explain Georgism to people, one of the questions they ask that I don't really have a good answer to is "how do we determine the capitalization rate that should be used to derive the periodic LVT from the value of land?" I don't have a good answer other than the one you give in your Georgism series: you use the prevailing rate in the area. More broadly, I'm curious how *anyone* decides on a desired cap rate on land (other than "getting my money quicker is better").
When I consider how the Fed works, one of the questions I have is "how do we determine the interest rate that should be used?" I don't have a satisfying answer other than: the Fed reacts to a wide range of economic and political factors and ultimately it's kind of an art more than strictly a science.
If fiat currency is backed by a country's land value, which is itself the result of real productivity, and loans against that land are one of the big ways in which money makes it from the Fed into the economy, which are used (ideally) to boost said productivity...is the aggregate cap rate on land (or the desired LVT cap rate) somehow related to the "ideal" federal interest rate? Both of them seem like ways to adjust the rate at which real underlying value gets converted into a form that's useful to the economy. Does that make any sense at all?
This was incredible, thank you!!!
I’ve been researching this topic for an article and I’m struggling with the alternating use of “sell” and “lease” both in this book and others. I understand that Singapore land leases work like a sale (as in, the buyer takes out a loan to pay for the lease and then has a mortgage on it), but are actually a lease (what they are buying is a 99, 40, or 20 year lease, whatever is left on it!)
In the case of Hong Kong and China though, if I am understanding this correctly, they actually *sold* off a bunch of their land rather than lease it in order to raise short term money while shooting themselves in the foot to the long term earning potential of that land via leases. Is this correct?
This was interesting but there seems to be a fatal flaw in this part of the logic:
"In a rising real estate market, however, investors feel it’s safer and better to buy land and wait for it to go up in value. This not only bids up the price of land, but also sucks capital out of the actually productive part of the economy. That lost investment could have paid for tools, materials, research, and workers. Instead, it just inflates the price of land."
How does it "suck capital out" the rest of the economy? Every land purchase is also a land sale, the purchase price is also a sale price. There is no money that "goes into" land. The buyer has less cash, but the seller has more cash. Presumably the seller (who must have had the opposite view to the buyer in terms of its price potential) can invest in the productive part of the economy?
So, it's true that "money doesn't get deleted" when it changes hands, but your premise, as stated, could be said about any other kind of investment. Taken to its natural conclusion, this would seem to imply that there is no such thing as malinvestment, and that any allocation of capital must be socially neutral because the money always ends up somewhere else?
Thanks for taking the time to reply.
My point actually only really relates to land, or other assets/investments that are in fixed supply. It's actually the very fact of its efficiency of a tax base (cannot change the amount of land) that makes malinvestment in land impossible.
It is possible to build (say) too many datacentres. That happens because people use money to get others to spend their labour (construction labourers) or materials (steel, concrete, etc.) to assemble a datacentre. If slowing AI demand or whatever means that this does not earn its cost of capital, there is malinvestment. The wasted resource is the time, effort, and raw materials used to assemble a datacentre.
But that is not true for "malinvestment" in land. No extra resources are diverted to creating the land - it was there already.
For the avoidance of doubt, I guess a land bubble could create some forms of malinvestment, but these are all the ancillary services like real estate agents, bank managers etc. The actual land itself is perfectly inelastically supplied - there can be no wasted resources in creating more of it.
This is a point that I think Schneeaffe was making in his comment when he said: "How does this work? With normal investments, like when Im buying a machine, I pay to divert labor to build my machine. Obviously investments like that can crowd each other out. But when I invest in land, nothing needs to be done."
Thanks for clarifying. If you don't mind, it would help me better understand your position if I could ask this -- what is your understanding about what happened with the infamous Japanese Land bubble and its subsequent decades-long fallout? How do those events inform exactly what you mean here by "malinvestment in land is impossible"?
I'm no expert on the Japanese land bubble, though I've looked at it before. I knew of the NZ government sale of the tennis-court-sized plot for a huge sum (I'm an economist in New Zealand). The first and most direct fallout would be wealth transfer: if a Japanese buyer paid a massive premium to a foreign seller for land that subsequently crashed in value, that's a straightforward loss for Japan and gain for New Zealand.
But I think the main damage from the Japanese bubble operated through the banking system. Banks lent to buyers who purchased from sellers. Net sellers during the runup were enriched; banks were left holding loans backed by collateral worth far less than the principal. When the bubble burst, the banking system became dysfunctional for years. Richard Koo's work on "balance sheet recessions" documents this mechanism well.
So the land bubble didn't cause overinvestment in land (which I maintain is impossible, since no resources are consumed in creating more of it). Rather, it functionally destroyed the credit market. That's terrible,and might well call for all the Georgist solutions you and Bird advocate, but it's a different mechanism than "capital sucked out of productive investment."
The secondary problem was genuine malinvestment, but in structures rather than land. Skyscrapers make sense when land is extremely valuable; less so otherwise. The inflated land prices sent false signals to the construction industry, inducing overbuilding. Real steel, concrete, and labour were wasted on buildings that didn't justify their cost.
I'd also concede that speculative churn consumes real resources in transaction costs: lawyers, agents, loan officers, appraisers. If a bubble increases turnover, more labour gets absorbed into facilitating what are ultimately zero-sum transfers.
To be clear, none of this necessarily undermines the case for land value capture policies, but I see the "overinvestment in land" story in NZ all the time and when questioned people do seem to have some sort of view that the money gets sucked into the land somehow.
Okay, I see what you're talking about here. It may very well be the case that we actually agree on most or even all of the substance, and this mostly amounts to a semantic argument?
That said, we should all strive to be semantically correct, because it is technically correct, the best kind of correct.
What you here call "functionally destroying the credit market" is what I really mean by "capital sucked out of productive investment." That, along with the secondary problem in misallocating *what ought to be built* and *where*, in terms of actual material things in the world.
RE: "money gets sucked into the land somehow."
Maybe part of the confusion is both of us being slightly imprecise about whether we're talking about *money* or *actual physical wealth in the world*. It looks like I certainly made this mistake that when I casually tossed around the word "capital" above, by which I really mean credit, which is not quite the same thing, even after I went to great lengths back in the day to differentiate such terms:
https://gameofrent.com/content/progress-and-poverty-review#i-wages-and-capital
Thanks for engaging on this - it's made my thinking clearer.
I think we are probably converging, but I do think the distinction between "capital sucked out during the bubble" and "credit market destroyed by the crash" points to different timing and mechanisms:
The "sucked out" framing implies ongoing harm while the bubble inflates: resources continuously diverted to unproductive ends. Under this view, the bubble itself is the problem.
The balance sheet/credit framing means the primary harm is collapse and its aftermath: banks left holding impaired assets, unable to lend, triggering extended and painful deleveraging. Under this view, the bubble is mostly redistributive while inflating (enriching early sellers at the expense of late buyers), and the damage is all through the financial sector when it bursts.
On money versus physical wealth: yes, I think that's where some of the imprecision creeps in. Credit creation and destruction seem to me to be thee problem, not flows of pre-existing money or physical resources. Does this matter? Well, I think most malinvestment would create significant problems even if 100% equity financed (e.g. someone builds way too many datacentres and then AI demand doesn't show up), but if what I'm saying is correct, land bubbles that were 100% equity financed (maybe impossible, sure), would not actually destroy resources.
Being an 83 years old man, I can't honestly say I understand the argument you are here, but I do understand George's original case for capturing the unearned increment caused by urban development. In fact I recommend that approach in the new country towns (actually "garden cities") I propose in my manifesto, A Part-time Job in the Country: Notes Toward a New Way of Life in America. You and some of your readers might be interested. Here is a link: https://www.amazon.com/dp/B00U0C9HKW
This is a really interesting idea. I’m actually writing about the garden cities movement now, and my husband works in manufacturing in both the US and Europe.
In the US factory work is already contract and rural, but there are a lot of downsides to that (factories are usually in the middle of nowhere and workers are staying in isolated trailers for their multi-month contract). Europe is better (factories are in the city and workers can live a normal life, factories even recycle heat into the cities etc) but both struggle to find workers and don’t need as many now that factories are so automated.
The garden city movement was a very good one, and could definitely be revived for our times, but it might be less geared around factory work?
Hi Elle! Thanks for your comment. It is, granted. a very difficult problem to solve as it requires a coordinated move of both labor and capital to a heretofore relatively undeveloped location. I hope you read A Part-time Job in the Country to see how I propose solving that problem. You'll see why a machine in the garden (i.e., factories in the countryside that run on part-time jobs) are a necessary part of the solution. They serve to anchor the new country towns, which can grow from there into true garden cities. Thanks again.
Thanks, I’ll check it out!
> fiat currency is backed by land
It seems like this could be explained a bit better? As I understand it, this can be unpacked as:
- Banks create money. Today, most money is in the form of bank deposits.
- Banks own mortgages and real estate loans. (among other financial assets)
- Mortgages use land (and buildings) as collateral.
So, perhaps it would be better to say that fiat currencies are *partially* backed by land?
If you own a house, you could create money by taking out a home equity loan. But then again, you could do the same with a credit card, which is an unsecured loan.
It’s a good trick, but creating money (by borrowing it) isn’t free.
But what if I reject Ricardo's Law of Rent as being overly simplistic? While the core logic works for econ 1, the simplifying assumptions seem to be better suited to the 1890s than the 2020s. Today, human capital and technology dwarf raw land in importance. Further, government regulations like zoning are directly responsible for most of what looks like scarcity today. If I were an economist i might quip: land is not destiny, bad policy is destiny. You should fix the regulatory restrictions before you redesign the system to accomodate bad policy.
>Land outcompetes other assets as an investment
How does this work? With normal investments, like when Im buying a machine, I pay to divert labor to build my machine. Obviously investments like that can crowd each other out. But when I invest in land, nothing needs to be done.
In a couple of ways. First, there's the trivial sense in that money that is spent investing in land could have been spent on anything else, and wasn't.
The more important thing, however, is that if I invest in land just to sit on it, I'm taking up a piece of land that someone else--such as someone with an actual business plan to work the site--could have bought instead. Further, the money I invested bids up the price. So someone with an actual business plan now has to pay more to acquire land, which leaves them with less money left over for the actual business part of their plan. That's less money that's available to pay for tools, machines, research, and workers.
But thats just monetary, nothing real has been consumed. Whatever I would have bought with that money otherwise is bid up in price slightly less, and this slightly increases the value of money, to exactly balance out the "lost" money.
>if I invest in land just to sit on it, I'm taking up a piece of land that someone else could have bought instead.
Yes, thats another thing I wanted to ask about. The only way you make a profit on the speculation if you can sell to someone who is willing to pay more than you payed plus interest, which mean hes also willing to pay more than the other entrepreneur Ive priced out plus interest. Normally, this means he has a use for it thats more valuable than that of the other guy plus the fallow time, and things were made better by waiting for him. Why doesnt this apply here?
> But thats just monetary, nothing real has been consumed.
To own land is to have the right to exclude others from its use. Literally every piece of economic activity requires access to land, and when the best land is held and kept out of use, it pushes those activities onto less productive land. This is the force that drives suburban sprawl, for instance. This in turn causes many actual real resources (besides land) to be consumed and used up that would not otherwise have been, because the more efficient production that could have been performed on the prime land is now pushed out to the more marginal land. As a simple example, when high density housing is not built on prime downtown land right next to productive job centers, housing gets built on the edges of the city, and this leads to more time spent commuting, which consumes both time and resources that would not have been spent if that housing had been built in the city center on a prime located lot, rather than having it sit fallow as a parking lot.
> Normally, this means he has a use for it thats more valuable than that of the other guy plus the fallow time, and things were made better by waiting for him. Why doesnt this apply here?
Because land is necessary for all economic activities, owning the best located land gives you unique leverage over the economy. Speculating on land is a bet that the location you own it in will increase in population/productivity over time. This increase in population and productivity is provided by your neighbors, not by you, especially if you are not building anything on your land but just letting it sit there. Nevertheless, this increase in population and productivity will cause demand for your land to rise. You can also get in a situation where people (falsely) believe that Land must always rise in value, so you can hold out simply because of speculative mania. This has happened multiple times in East Asia, for instance, with devastating long term consequences when the bubble finally bursts and prices reset to what actual productive activities can return.
Of course, if your city goes into decline, you will have made a bad bet and you will lose money. My argument is not that land speculation is a guaranteed way to make money, but that it is bad for the overall well being of the economy.
Ad 1), I think youre just describing the consequences of 2).
Ad 2, I agree that land bubbles are bad, and theres a reasonable argument that land is more likely to get them, but the problems described here are just the problems of malinvestment in a bubble, which are the same regardless of what asset is bubbling.
I'm curious, maybe you can expand on your position so I can help understand where you're coming from. Are you asserting that land is in principle no different than any other kind of asset, or are you making a different argument? Whether or not we reach an agreement I'd like to at least come to understand the crux of where we might disagree.
No, and in fact my initial argument against investment outcrowding does use one of its special characteristics, not being produced in response to demand.
Im saying that while youve *mentioned* special characteristics of land, you havent connected them to the bad outcomes you described. For example:
>This increase in population and productivity is provided by your neighbors, not by you
This is true of many speculations. For example, say I expect some new research using cerium to turn out great, and I buy and stockpile cerium, and then when it works out and the price of cerium rises and I sell. The value of the cerium was increased by the work of the researchers, not mine - yet, I have provided a valuable service. I made sure there would be a lot of cerium available for this new, higher-value use, rather than being used for something lesser beforehand.
This factum, and the remainder of this point, are unconnected to the special characteristics, even though you start out saying "land is necessary for all economic activities".
Hi Lars (or anyone),
Who is the rightmost Georgist in your poster, just right of Sun Yat-sen?
Douglas MacArthur, who helped Ladejinsky ram the reforms through in Japan and other places.
Hard to recognize him without his aviators and corncob pipe, I know!
Wild, I thought it might be him, did an image search for the top option, and thought “no, definitely not”.
Hard to recognize him without the corncob pipe and aviators, I know.
I never knew HK messed up their Geoism so bad. Seemed like it worked well for them in the decades following WWII...?
Indeed. Land reform is a great short term solution, but not a long term one, and just having land leases doesn't solve the problem if you don't actually collect land rent. As long as land rent flows to private hands, land speculation can still run free even if the state "owns" all the land.
Also, the thing about 99-year leases is that there's a real question about whether they will actually devolve when their time is up. When your leases are so long and your country is so young, it's worth thinking about what the pressures to just hand them over will be like.
Seems better to have leases be perpetual so long as the lessee pays their ground rent.