I’m going to approach the issue of land value from a market perspective. Basically, look at how the market responds to a set of circumstances, and consider whether those responses are appropriate or not. Following on from this, I’ll point out a couple of areas where Henry George didn’t (or wasn’t able to) carry his thought processes far enough.
But first – what is it that we pay for when we ‘buy’ land?
It’s not the same sort of purchase that we make in most instances, where we receive a good of some sort in exchange for a payment.
What we receive is a perpetual monopoly right to the use of that land and the right to the change in value that accrues to the land while we own it, against which is held a (arbitrarily changeable) series of government rights, conditions and charges. We call this freehold land.
So the value we place on land is twofold. Firstly – the value of its use, and secondly the value we place on the likelihood that the value of its use will increase. What Henry George’s proposal does is remove that second consideration by charging for the land on an ongoing basis for the value of the land at the time. For the sake of discussion, we will call this arrangement flowhold land.
This change results in a dramatic difference in the way price responds to change.
George and Bob purchase unimproved blocks of land next to each other, near a minor city. Bob purchases his land for $100,000 under the normal ‘freehold’ arrangement. George purchases his land under a newfangled ‘flowhold’ arrangement and pays $700 a month to the government. Curiously, Bob is paying a similar amount each month to the bank to cover his debt.
Both build houses on their land, and life goes on pretty similarly for both. Until one day, the farmer across the way puts in a mushroom composting facility. Now this produces a noticable odor, taking away from the amenity of the location. Bob can’t stand the odour and sells up, but his land has fallen in value due to the stench and he receives $20,000 less for the land than he paid for it.
George however finds that the next month, his payment for his land has dropped to $560.
This illustrates the key benefit of Henry George’s proposal. When ‘shit happens’, the owner of the land receives an automatic and commensurate benefit. It doesn’t matter if that is a compost farm, a flood – think of the Brisbane situation – or a general economic downturn (as we are seeing across most of the country these days). In every case where the value being derived from the use of the land drops, the payment required drops. This automatic balancing is a key stabilising influence on any market system.
Our current arrangement doesn’t have that balance -in fact it has the absolute opposite. When ‘shit happens’ to land we own, we lose out on both the benefit that our land brings, as well as losing out in a capital sense on the value of the land itself. Under freehold, negatives consequences are compounded, rather than balanced.
Now the same thing happens to the upside.
A year later, a school opens up just down the road, in response to increasing numbers of people living in the area. Now George has a couple kids, and this suit him just fine as it cuts down significantly the time he has to take to get his children to school. He does note that his next bill for his land has increased back up to $630, but considers it a worthwhile exchange. He also notices that his childless neighbour has sold up and moved on, picking up a quick $20,000 in the process.
So the new neighbour – simply because circumstances beyond his control changed – made $20,000. Now those of you quick on the maths will have noticed something. The increase that occurred in the price of freehold land was greater than the increase in cost for flowhold land. Given that the land is increasing in value due to people moving in to the area, it can be reasonably expected that further improvement will take place in the future, and we naturally price this in when buying and selling land. It is called speculation. Now speculation is not wrong in and of itself; in many cases it provides a useful risk reduction service for others. However, when taken in relation to land value, it results in the boom bust cycle we have seen elsewhere around the world, and are starting to see (the bust side anyway) here in Australia now.
The exaggeration of the natural cycle and changes that take place due to the nature of freehold land are not good for anyone but the immediate beneficiaries of the upside. The major resultant downsides are the relative reduction in wages and capital return that result, and the increased incidence and severity of poverty. While I may address this later, at this stage, I’ll just suggest you read ‘Poverty and Progress’ to understand the mechanisms behind this.
Taking things further
There are two failings in Henry George’s proposal that I’d like to address. One I’ll address today, which is that he oversimplifies the redistribution of the bounty received by the community from land. The second is that his proposal for transition makes the basic assumption that two wrongs make a right, which I will deal with in a later piece.
Henry George makes the basic simplification that the return from the land should pay the costs of government and then any excess be returned equally to all citizens. While this sounds right and noble, consider the following situation, after a substantial proportion of the land is held as flowhold:
Country Grammer was the new school that had been set up in the local area. Privately funded, it had opened the doors for significant growth in the area. There wasn’t a lot of excess, but fortunately for them, they managed year to year and grew with the area.
In the next suburb over, the government established a public school, which in similar fashion grew with the area.
Now the government saw a similar benefit to land prices in each suburb. However the had only incurred costs in relation to establishing the public school. Over time, this result was repeated, leading to a reluctance on the part of the government to establish public works, preferring to allow the private sector to carry the risk while they received the windfall.
Under the freehold system, the problem we face is that private interests receive windfall benefits from public works. Under Georgism, the public interest receives windfall benefits from the private sector. To complete the loop, there must be redistribution out of the public rent to compensate for the increase due to private investment. The benefit due to a private school, or a new industry, must be calculated and disbursed to the originator of that investment.
On the other side, the system provides as well for situations where a private concern causes public loss:
Now Bert was the farmer who owned the composting facility. He did quite well out of the operation, thankyou very much. And as the land had been in the family for generations, he didn’t much consider the effects on the surrounding area. He had no intention to sell and no debt, so the capital value didn’t matter to him.
However, what he was doing mattered very much to the state government, who were losing out significantly due to the impost upon the local area. After investigation, Bert received a notice for lost revenue due to his well.. stench. He was staggered by the amount lost – many times more than the returns he received. After some discussion with the state representatives, an arrangement was made to transfer the land to flowhold and to use the proceeds to relocate the industry somewhere less built up.
The flowhold system thus provides the answer to both public and private windfalls and losses. Value provided by the community must be collected for the community. Value provided to the community must be recognised by the community. Only when both occur do both private and public interests work for mutual benefit.