Many people in developed countries think that land is no longer important. The control and allocation of land is rarely mentioned in media discussions of economics. Yet people everywhere are as dependent on the natural environment for survival as ever they were. The importance of land to technologically advanced communities is demonstrated by the fact that when inner city land is sold, it fetches a vastly higher price than farmland.
Failure to make the relationship of people to land the starting point for the study of modern economics has led to a proliferation of complicated, contradictory theories and to an imprecise use of terms. The confusion between ‘land’ and 'capital’ is particularly damaging to clear thought, because the two entities behave in utterly different ways in the process of wealth production:
1. Land is not produced by human beings at all, while capital is produced entirely by human activity (labour) operating on land.
2. The supply of land is fixed; the supply of capital can be increased almost indefinitely to satisfy human requirements. If people want ten million more spades, or ten million more computers, these can be made. If people want one extra acre of land, there is no way in which it can be made.
3. Land is permanent; capital, like other forms of wealth, decays in time. A great building may last for centuries but only with constant maintenance; and eventually it crumbles. Most kinds of capital - such as factories, machinery, tools etc., last for a much shorter time.
The result of obscuring the difference between land and capital does not stop at intellectual confusion. The consequences of the confusion are mistaken attitudes, which lead to wrong economic policies and, in the end, a massive amount of unnecessary human misery and suffering. As a result of the confusion several baleful consequences follow.
1. The common right to land is ignored. Land is the common pool of resources from which all human needs are satisfied. No human has ever made it, so common sense demands that we should share it equitably.
2. Wealth is not distributed fairly. As wealth is the product of human labour, mental and physical, applied to the common resources of the earth, it is right and natural that wealth should belong to those who create it.
Yet in our own society, where people have come to regard land as just one of many human possessions which can be sold or hired for profit, it has come about that the many who are without land depend for the opportunity to work on the comparatively few who own potentially productive land. In consequence, a large share of wealth is taken by those in control of land before work can be done upon it to produce more wealth. The result is intense competition for jobs, low wages, and unemployment.
3. The contribution of land price inflation to recurring industrial depressions is seldom recognized.
Because land is different from all other human assets in being a fixed quantity, market forces do not act on it in the same way as on labour and capital. In times of boom, land prices soar unchecked. Land takes too large a share of the total wealth produced and not enough is left to the providers of labour and capital to keep the processes of manufacture and exchange going.
When industry starts to expand, the demand for land grows with it and the price begins to rise, both buyers and sellers anticipate that the limited supply of land will be even more valuable in the future, and so the price is raised every time it is sold.
Speculators simply hold on to land, keeping it unused or underused, waiting for the price to rise. Others acquire land, not for use but to sell at a higher price later. Builders, who anticipate that the land they will need in the future will cost them even more, set up 'land banks’ to protect themselves from future increases in land prices. All this reduces the amount of land available for use, and pushes rents and selling prices still higher.
In time, some people or firms pay a speculative price for land which is so high that current production becomes unprofitable and they fail. Other firms close down when their leases fall in and they cannot renew them at the new rates which are demanded. This has a knock-on effect. Workers lose their jobs. The consequent reduction in their purchasing power means that other firms lose sales. They too have to close down, and there is further unemployment. The downward spiral accelerates.
Eventually, reduced industrial and commercial activity reduces the demand for land, and therefore the price. This continues until the price of land is low enough for businesses to pay the rent or selling price for land and make a profit again. The cycle is then set to repeat itself.