“There is in reality no conflict between labor and capital; the true conflict is between labor and monopoly… Abolish the monopoly that forbids men to employ themselves and capital could not possibly oppress labor…”Henry George, Protection and Free Trade, p. 277

“Land monopoly is not the only monopoly, but it is by far the greatest of monopolies – it is a perpetual monopoly, and it is the mother of all other forms of monopoly. Unearned increments in land … are the principal form of unearned increment, and they are derived from processes, which are not merely not beneficial, but positively detrimental to the general public.” – Winston Churchill, in a speech made to the House of Commons on May 4, 1909

“Buy land, they don’t make it anymore.” – Mark Twain

“The rent is too damn high.” – Jimmy McMillan

Probably the worst possible market imperfection is a monopoly in something vital. It does not require much game theoretical calculation to see how an agent in such a position can practically exploit others in the economy at his will and extract “rent” without producing any value to others whatsoever. You don’t need much of a theory of interest or capital to see that When there is a limited, vital resource with no substitutes, there is always on incentive to hoard it – even just to keep it out of others use, as this raises its market value further.

And a market economy has always had such a natural monopoly resource: land. In its broader meaning, “land” refers to all natural resources and privileges that cannot be produced with human labor. But the most important case of this is location! Location is often a more significant component of the value of a piece of real estate than the buildings and other improvements. Private, untaxed ownership of location is at the heart of many economic inequities and inefficiencies.

Urbanization, bringing many people to live close together to cooperate and trade efficiently, has increased human productive potential significantly. But this has come with massive polarization of income differences and an increasing concentration of wealth. Why? A major factor is that much of the increases in productivity and living standards have resulted in rising rents and hence higher real estate values in central locations! Also public infrastructure investments (roads, rail lines, parks etc.) are similarly capitalized into the value of surrounding land. A growing city is practically a grand pyramid scheme where those who have managed hoard up the real estate first gain disproportionately to the rest of the population. Not only does this result in inequality, unearned gains and continually recurring real estate bubbles, but also inefficient land use and urban structures (aka urban sprawl). Lower interest rates only escalate these bubbles – they are not the fundamental cause.

Producible real capital investments (machines, buildings, human skills etc.) would not necessarily always need to make a profit to be profitable (if interest rates drop low enough). But lucrative locations cannot generate a negative cash flow, as new, competing location cannot be “produced.”

The monopoly nature of land has been acknowledged at least since Adam Smith. Henry George brought it to the center of economic discussion in the late 19th century pointing out its many harmful effects. George also presented a simple solution: the land value tax (LVT). Private ownership (control) of real estate, which has its benefits, does not need to be abolished. An annual LVT of 6-20 % of market value would leave only a part (~20-50 %) of the location-generated income to the owner. This would prevent harmful hoarding and underusage making sure that lots are always kept in the most profitable use allowed by zoning. It would also make real estate prices less volatile (less sensitive to both interest rates and economic growth forecasts) preventing bubbles as well as generate public revenue without hampering economic activity (consumption, production and investments). For example, public infrastructure investments are currently a massive wealth transfers to local landlords. A high LVT would bring a majority of this additional income back to the government. Systematic compensation policies for rezoning and public investments could capture part of the rest.

Many economists agree that taxing land values (and other monopoly rents) is one of the most efficient (least harmful to economic activity) ways of collecting public revenue, even if they wouldn’t fully comprehend its necessity for a fair and efficient economic system.

Interestingly, for the last half-century, LVT has been suppressed out of mainstream political discussion altogether – probably out of interest-group-political reasons. Instead, it is trendy to blame real estate bubbles on “too low interest rates.” This is pretty much arguing that the returns on other capital should be kept high (capital should have a “minimum wage”, regardless of actual supply and demand) just so that monopolies don’t become more profitable to own and too volatile, which they are naturally in any case.

Fair valuation of real estate and replacement costs of buildings have their practical challenges, but these are not insurmountable – especially if the real estate market was made more efficient by removing all subsidies on homeownership. Another political challenge is that a suddenly implemented LVT would be a massive wealth transfer, as it would cause real estate values to plunge. How this can be avoided with gradual roll-out and coadoption with negative real interest rates is discussed in more detail in the Fixing the Root Bug.

There are also many “natural monopoly industries”. Most of these are strongly location-dependent industries, like basic infrastructure (roads, pipelines, electric grids etc.), but also central financial clearing systems (the central bank, clearing systems for stocks etc.) qualify into this category. As competition cannot efficiently incentivize a private owner to develop the quality of the service provided or lower prices, such industries could work better in public ownership – especially after the public sector has been relieved of its implicit responsibility to provide and maintain employment (the “jobs” argument), which now hampers its productivity development.

Section 4.3 and appendices in Fixing the Root Bug explain these issues in more detail and:

  • Explain the effects of LVT (and current accommodation subsidies) on real estate values
  • Discuss challenges with fair valuation and replacement cost assessment
  • Clarify the need for and the objectives of central city planning (including zoning)
  • Present the case example of the Helsinki metropolitan area and its taboo construction cartel.

They also suggest (for further discussion):

  • Using a market value tax (similar to LVT) on patents (technology monopolies) to prevent patent-trolling and hostile patenting, to reduce litigation costs and to ensure that the patents are sold or licensed for the most productive uses available
  • Auctioning sustainable use quotas of renewable (but destructible) natural resources
  • Taxing non-renewable natural resources (like mineral ore supplies) both by LVT and the negative externalities caused by their extraction and use
  • A hypothetical alternative to democracy in the form of competing governance forms acting as common ownership vehicles for natural resources.

Chapter 1.1.11 and appendices elaborate on the fundamental imperfections of a completely “free market” with untaxed and unlimited private ownership of everything and anything. FtRB also goes deeper into the whole institution of ownership as a “bundle of rights” and popular assumptions that go with it.

Related documentaries:
Real Estate 4 Ransom

http://realestate4ransom.com/

The Taxing Question of Land

https://www.youtube.com/watch?v=1pYSsME_h7E

Related organizations and cites:
http://www.henrygeorge.org/
http://www.prosper.org.au/
http://www.earthsharing.org/