2.6.1-4: The Law of Land Rent
What is Land Rent?
Classical political economists (Adam Smith, John Locke, David Ricardo) observed that no rent could be commanded for land as long as comparable land was available for free. However, when the best land is used up or enclosed by particular individuals or groups, then the next best quality of land is utilized (although at a higher cost of production) and then the next best (at a still higher cost of production) and so forth. As a result, “land rent” was defined as the different in the cost of production on the poorest or least favorable tract of “no rent” land being used and the cost of production on areas of land with better soil or more favorable locations.
The uniqueness of land as an Economic asset stems from its fixed supply and immobility. It is an indispensable part of all kinds of Economic activities i.e., Agrarian, Industrial or Service. Land rent is the price annually paid for the exclusive right to use a certain location, piece of land or other natural resources.
The market value of any particular parcel of land is a product of the locational advantages enjoyed by it which in turn are facilitated by nature and the benefits and services provided by the community. Land value can be considered as the relationship between a desired location and a potential user. The ingredients that constitute land value are utility, scarcity and desirability. 'Land Rental Value' is the annual fee individuals are willing to pay for the exclusive right to use a land site for a period of time.
Whatever is not collected as Land Rent will be capitalized into the Market Value of lands by the landowners. Exorbitant rates of market value of land are impediments to emerging entrepreneurial activities involving land. Landowners sell the Capitalized Land Rent, i.e., Land Value which is uncollected by the community even though it is unearned income. This widens the disparity between landowners and non land owners.
Because of the type of property-in-land system in place in much of our world, there is profit to be made from simply holding (owning, claiming) valuable land sites or large tracts of land. As development intensifies cost of land further increases due to land speculation and hoarding. The landless and coming generations must pay a steadily rising amount for land access. Eventually, increasing numbers of people who could otherwise be productive and well able to meet their basic needs are driven to subsistence levels and worse because they cannot pay the inflated land costs.
The rental value of land sites comprises at least about 20% to 30% of gross domestic product (GDP) in most countries, an amount that in poorer countries is sometimes greater than all government spending combined. The land value capture capacity of land is an even larger fraction of GDP where population is densest and competition for good land consequently most intense. Where extraction of oil or minerals is the major industry of a country or region, total natural resource rents can even exceed 50% of GDP. Economists call private pursuit of this publicly created value “rent seeking.” Many now view this as a method of obtaining unearned gains at society's expense and thus a root cause of the worldwide grossly inequitable distribution of wealth.
Justice requires that land values, which are created by society and nature, be made available for public improvements. This is the responsibility of good government.
Note: The What is Land Rent? section draws from Land Rent Structure an article by Sanjeeb Mishra, a member of the Indian Administrative Service, and District Magistrate and Collector, Ganjam (Orissa, India).
Module 2, Section 6.1-4
The Law of Land Rent
The theoretical and analytical insights of classical economists concerning land and land values hold important keys for how to harness market forces to more readily secure affordable access to land, hence enabling people to procure adequate shelter and fulfill other basic needs. Correcting market distortions by capturing land values for use by the public sector while reducing or eliminating taxes on labor and production, is a major one of those keys.
6.1 This series of graphs will help you better understand the problem of land price inflation, the root cause of the maldistribution of wealth, and how the few come to own and control most of the capital as well as the land. NOTE: These ten graphs are on the Henry George Institute website. After #10 please return back to this Land Rights course website.
- Understanding Economics: The Law of Rent
- Law of Rent 2 – First Comer – Keeps All Wages
- Law of Rent 3 – Second Comer – Rent Begins
- Law of Rent 4 – Third Comer – Further Rise of Rent
- Law of Rent 5 - Fourth Comer – All Land Used
- Law of Rent 6 – Other Natural Differences
- Law of Rent 7 – Growth of Population
- Law of Rent 8 – Effect of Industrial Growth
- Law of Rent 9 – Land Speculation
- Law of Rent 10 – Speculation Abolished
The predictability of the "law of rent" - that land values will continually rise, and faster than wages - fuels frenzies of land speculation and inevitable bust that follows the boom.
6.2 Adam Smith did have some understanding of this problem of rent. He said:
Every improvement in the circumstances of society tends either directly or indirectly to raise the real rent of land, to increase the wealth of the landlord.
6.4 Click On: One Step Deeper – This Law of Rent chart shows that by eliminating speculation and land hoarding and using the land efficiently the community can afford to provide infrastructure and services even while spending less public revenue than before!