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 consequences
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.

Land: The Forgotten Factor by Henry George Foundation

Image: Archigram: Sea Bubbles

  • Me:*yawns* boy am I tired. I think I should go to be-
  • Uterus:*In Mushu voice* I LLLLIIIIIIVVVVVVEEEEEEEEE!!!!!
  • Me:Oh, hell no not now...
  • Me:No.. God please no... can't this wait until morning.. or never. Never would be nice.
  • Uterus:TIME TO OPEN THE GATES TO HELLL!!!! *begins spouting blood violently and stabbing the inside of my body with a hot poker*
  • Me:*single man tear* I. Just. Wanted. To. Sleep. *curls up into a ball and awaits death*

Tom Woods analogizes the Austrian Business cycle, in a rather humorous and yet depressing way.

–Shared by Elle.

Austrian Business Cycle Theory

In contrast to most mainstream theories on business cycles, Austrian economists focus on the credit cycle as the primary cause of most business cycles. Austrian economists assert that inherently damaging and ineffective central bank policies are the predominant cause of most business cycles, as they tend to set artificial interest rates too low for too long, resulting in excessive credit creation, speculative “bubbles” and artificially low savings.[52]

According to the Austrian business cycle theory, the business cycle unfolds in the following way: Low interest rates tend to stimulate borrowing from the banking system. This expansion of credit causes an expansion of the supply of money, through the money creation process in a fractional reserve banking system. This in turn leads to an unsustainable “credit-fuelled boom” during which the “artificially stimulated” borrowing seeks out diminishing investment opportunities. This boom results in widespread malinvestments, causing capital resources to be misallocated into areas which would not attract investment if the money supply remained stable. Austrian economists argue that a correction or “credit crunch” – commonly called a recession or bust – occurs when credit creation cannot be sustained. They claim that the money supply suddenly and sharply contracts when markets finally clear, causing resources to be reallocated back toward more efficient uses.

Friedrich Hayek was one of the few economists who gave warning of a major economic crisis before the great crash of 1929.

Simple Explanation of the Business Cycle

“The reason for the business cycle is as elementary as it is fundamental. Robinson Crusoe can give a loan of fish (which he has not consumed) to Friday. Friday can convert these savings into a fishing net (he can eat the fish while constructing the net), and with the help of the net, then, Friday, in principle, is capable of repaying his loan to Robinson, plus interest, and still earn a profit of additional fish for himself. But this is physically impossible if Robinson’s loan is only a paper note, denominated in fish, but unbacked by real-fish savings, i.e., if Robinson has no fish because he has consumed them all.

Then, and necessarily so, Friday must fail in his investment endeavor. In a simple barter economy, of course, this becomes immediately apparent. Friday will not accept Robinson’s paper credit in the first place (but only real, commodity credit), and because of this, the boom-bust cycle will not get started. But in a complex monetary economy, the fact that credit was created out of thin air is not noticeable: every credit note looks like any other, and because of this the notes are accepted by the takers of credit.

This does not change the fundamental fact of reality that nothing can be produced out of nothing and that investment projects undertaken without any real funding whatsoever (by savings) must fail, but it explains why a boom — an increased level of investment accompanied by the expectation of higher future income and wealth — can get started (Friday does accept the note instead of immediately refusing it). And it explains why it then takes a while until the physical reality reasserts itself and reveals such expectations as illusory.”

  — Hans-Hermann Hoppe, Why the State Demands Control of Money.

The pace of business dynamism in the U.S. has declined over recent decades. The decline is evident in a pronounced declining trend in the pace of both gross job creation and gross job destruction and in declining trends in alternative measures of establishment and firm level volatility. An important component of these declining trends is a marked decline in the firm startup rate. A recent finding in the literature is that the changing composition of U.S. businesses cannot account for the decline in dynamism. This is partly because the changing industrial composition of the U.S. economy actually works in the opposite direction. The implication is that much of the decline in dynamism should be viewed as occurring within detailed industry, firm size and firm age categories. To explore the factors underlying this within-cell decline in dynamism, we address two sets of closely related questions in this paper: First, what types of startups have exhibited the largest decline and, relatedly, what types of businesses have exhibited the largest decline in dynamism? Second, is the decline in dynamism accounted for by a decline in the variance of idiosyncratic shocks impacting firms or by a decline in the responsiveness of firms to the shocks? 

I edited the headline for accuracy. =P For the record, a “recession” is a period of declining economic activity- i.e. a period where things are getting worse. “Recession” is not synonymous with “the economy is in the toilet,” though people apparently don’t seem to realize this. What we are in now is most accurately referred to as a recovery. *end rant*

The economy may be sputtering along. But it hasn’t been in recession for more than four years. More than half of Americans think it still is.

The Business Cycle In Brief

“We can only sum up the correct answer to the problem of the business cycle. We have already seen a hint of the solution: that inflation and the inflationary boom are caused by bank credit expansion generated by governments. In fact, government’s central banking system provides the key causal element for all business cycles, a cause exogenous to the market economy. Continuing government intervention sets in motion business cycles by generating inflationary booms. Because these booms distort the signals of the market place in interest rates and in relative prices they bring about grave distortions of production and prices, which must be corrected by recessions and depressions.

In short, government intervention cripples the market economy, and recession or depression is the painful but necessary adjustment by which the market reasserts itself, and liquidates the distortions committed by the government’s inflationary boom. After each depression, the government generates inflation once again, because it is the government’s natural tendency to inflate. Why? Quite simply, whoever is granted a monopoly of printing money (e.g., the Fed, the Bank of England) will use that monopoly and print - to finance government deficits, or to subsidize favored economic groups. Power will tend to be used, and the power to create money out of thin air is no exception to the rule.

And so we see - and this is the great insight of the “Austrian” theory of the trade cycle - that micro and macro economics are in harmony after all. The free market does tend to adjust harmoniously without boom and bust, without incurring clusters of severe business losses. It is government intervention in the market that creates the business cycle, and unfortunately makes the corrective adjustment of recessions necessary. The cause of the boom-bust cycle is not some mystical periodic Force to which man must bend his will; the fault, dear Brutus, is not in our stars but in ourselves, that we are underlings.”

         — Murray Rothbard

In this edition of Economic Update, we look at Verizon’s purchase of AOL, why Facebook’s “contribution” to ending inequality falls so short, how latest $$ gift to Yale increases inequality, how UK elections reflect “scapegoat economics, and why deadly Mediterranean migrations reflect capitalism’s globally uneven development. We also respond to listener questions on (1) Americans’ attitudes toward income and wealth inequality by our analysis of recent Gallup Polls and (2) whether student debts can lead to reduced Social Security benefits and what that means. This edition’s major discussions (1) build on “sharing unemployment” to show how we can combine respect for our natural environment with a fair sharing of the leisure that could result, and (2) analyze the significance of recent guilty pleas by major banks for manipulating currency exchange rates for their private profit.