The rent of land, therefore, considered as the price paid for the use of the land, is naturally a monopoly price. It is not at all proportioned to what the landlord may have laid out upon the improvement of the land, or to what he can afford to take; but to what the farmer can afford to give. — Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations
Mr. Donway has responded to the Senate’s recent failure to facilitate the selling-off of federal lands, by giving us a condensed history of federal land policy, a primer on the ideological fault lines of land and conservation policy, and a “better argument” for the sale of federal land. In some 3,500 words he argues that opposition to land sales succeeded principally because proponents of the measure on the political right were insufficiently committed to free market principles to see the change through, arguing that, going forward, conservatives ought to trust the market to deliver and push ahead with land sale reform. Mr. Donway’s piece is interesting, informative, well-reasoned, and takes the time to dunk on the progressive left’s weird and troubling obsession with the most hated of our enemies, Jean-Jacques Rousseau. In short, it has every redeeming quality of a right-of-center thought piece, except that of asking the right question. In this instance, Mr. Donway’s focus on the political philosophy of environmentalism coupled with a confidence in free market economics leads him to overlook the very first question he should have explored: why is the sale of federal land even necessary at all?
To be fair to Mr. Donway, he almost gives us an interesting answer to this question when he notes that, for most of American history, the federal government did not view land ownership as its responsibility. Suggesting, provocatively, that today’s vast federal holdings are inconsistent with the American political tradition and ought to be sold off for that reason alone. However, Mr. Donway steps back from this argument and instead adopts pro-housing (dare I say, abundance) justifications offered by the Republican senators who backed the land-sale measure. By increasing the supply of developable land, so the argument goes, more homes can be built, increasing the supply of housing and making homes more affordable. However, the quick treatment he gives to these lines of thinking, compared to, say, his excoriation of the anti-human Rousseauian roots of modern environmentalism, reveals where his true passions lie. Mr. Donway wants to build a better argument against the environmentalism of the left. Good for him, but let’s not pretend that he is trying to build more houses.
If he did want to build more houses, Mr. Donway would have done better engaging with the collected works of Adam Smith, David Ricardo, and Henry George. Collectively, their insights into the economics of land use make clear that the reason we have a housing crisis is not because the United States has ‘run out of room’—a claim so ridiculous that it can be effectively refuted by looking at a population density map—but because our tax system actively rewards unproductive, speculative, and low-density land-use. The result of these perverse incentives are cities filled with low-density, vacant, and undeveloped properties; expansive suburban sprawl which has become increasingly un-commutable; and the loss of precious and irreplaceable agricultural land and the rural communities who live on it. Without correcting these incentives, it does not matter how much federal land is sold off to developers—we will never solve the housing affordability crisis.
So, what do Adam Smith, David Ricardo, and Henry George have to say about this?
Ever since Adam Smith published his Wealth of Nations 250 years ago, most top-line economic thinking has entertained two factors of production: capital and labor. The basic idea went that labor produced wealth with the aid of capital and that some of that produced wealth was stored in the form of more capital. That extra capital could, in turn, produce more wealth with the help of labor. You can dig potatoes with your hands, but your labor would be more productive if you had some capital in the form of a shovel or tractor.
The realization that even the simplest economic activities require some form of preexisting capital to get started, and probably a good deal of stored capital to develop and advance in productivity, is the seed of all subsequent capitalist thinking. From this, we get good arguments in favor of the concentration of capital in private hands in a free market so that it can be put to productive use, allowing more labor to be more productive and increasing overall wealth. (Here we can also get great arguments against the concentration of capital in the hands of the state since political systems are, comparatively, much worse at capital deployment.)
However, this was only a shorthand and Adam Smith himself grasped at—though he did not fully understand—why this wasn’t the whole story. Reflecting on the tenant-farmer-landlord relationships so common in 18th-century England, Smith realized that landowners had a unique relationship to the tenants who worked their land. Namely, he noticed that because landlords held land monopolies—often they were aristocrats who controlled vast swaths of territory in each region—they charged monopolistic rents, extracting virtually all the wealth that was produced by their tenants. If a farmer did manage to increase his productivity by, say, hiring more workers (labor) or buying a tractor (capital), the landlord would simply raise his rent in response. This is what Smith meant when he explained that rent, the “price paid for the use of the land,” was determined by “what the farmer can afford to give.”
Some years later, David Ricardo formalized this observation into his eponymous ‘Law of Rent,’ which stated that the rent of any property is equal to its production value relative to the next best alternative. Ricardo illustrated this point by asking his readers to imagine a hypothetical landlord and tenant farmer, and three fields: two fertile fields capable of producing 100 units of production, and one marginal field capable of producing only 10 units of production: If a landlord owned only one of the two fertile fields, they could not charge any rent, because the farmer could always farm the other fertile field. However, if the landlord bought the second fertile field, he could charge the farmer up to 90 production units of rent—the maximum amount before the farmer would be better off farming the marginal, rent-free field. The boundary between the second fertile field and the marginal field is the margin of production.
It is hard to overstate the significance of the rule of rent and margin of production to our conversation about federal lands for two crucial reasons. The first is because they explain why the cost of land—or housing—is highest in the places where productivity is highest, namely cities; and second, because they explain why more and more ‘marginal’ places are becoming unaffordable and creating the sense that we are ‘running out of room.’
For much of human history, highly productive work was done in close proximity to places whose natural features were especially conducive to productivity. It is not a coincidence that the great cities of the world have invariably been built along coasts, rivers, fertile lands, and other natural resources—places best suited to trade, industry, and intensive agriculture. As cities developed—and since much of the production of modernizing industrial economies was confined to cities—access to urban land became incredibly important and expensive.
David Ricardo died in 1823, so he did not live to see England’s industrial cities in their full Dickensian horror, but he anticipated them. Observing the propensity of land rents to rise in tandem with the price of corn (grain) he noted, “The price of corn is not high because a rent is paid, but a rent is paid because the price of the corn is high.” In other words, the more productive land becomes, the more expensive rents get. This is why 19th-century urban laborers lived in squalor scarcely better than that which they left behind in the country even though the industrial labor they performed was more productive. Because the margin of production was still tightly circumscribed to cities themselves—you could not, for instance, work at a steel mill if you did not live near one—industrial workers had to live in the cities which provided opportunities for productive labor, and access to cities came at the price of steep rents.
For a while it seemed to many like the inequities of industrialization, the accumulation of untold wealth alongside utter poverty, were inescapable. Capitalists of all stripes accepted it as a necessary evil in the great advance of civilization, while some even sought to justify it by developing odd theories about ineptitude or the Darwinian unfitness of the working classes. Marx and other thinkers developed their own theories and proposed various schemes to address industrial inequity through the forceful seizure and redistribution of wealth. However, even these disparate responses still fundamentally agreed that progress and poverty walked hand in hand.
Enter Henry George, who, in 1879, published a book titled Progress and Poverty, which took aim at the very supposition that the two were inextricable. Building off of Smith and Ricardo, George developed a comprehensive theory of land economics which stipulated that land was its own unique factor of production alongside labor and capital. George observed that land’s chokehold to production—you need to labor or deploy your capital somewhere—made it an incredibly valuable asset which could generate tremendous wealth (rent) for its owners without the expense of labor or capital. The problem, therefore, was not that there was insufficient capital in the hands of capitalists or insufficient means of production in the hands of the proletariat—but rather that too much of the most productive land was in the hands of too few landlords.
George’s proposed solution to this problem was the ‘land value tax’, a levy on the value of unimproved land that would divert land rents from landlords and could be used to fund the state. (George actually wanted to use this revenue to fund a universal basic income, but that’s by the by.) Landlords could still own land, but they could no longer benefit from the owning of land alone, they would have to invest their labor and capital into improving the land instead. Taxing landowners on the latent value of their land would ensure that productive land was put to full productive use—typically through the construction of high-density housing or commercial buildings. This, as it turns out, was a shockingly good idea with a whole lot of beneficial second-order consequences and probably would have won George the mayoralty of New York City and probably changed the course of American land policy had he not died of a stroke four days before the election.
Like his contemporary Nikola Tesla, Henry George faded quickly from public memory even as his theories were lauded by generations of experts and his predictions corroborated by subsequent events. The progressive movement he had seeded turned to income tax as the preferred method of addressing inequality—a bullet dodged for the landlords—and the invention of the automobile pushed the margin of production beyond the city limits such that more areas ‘livable’ for people who’d previously depended on proximity to urban areas. The middle-class accountant who’d struggled to afford a home in Manhattan in 1940 could, by 1950, afford a nice single-family home in Long Island.
This was an unwelcome development for the rural Americans who had long encircled America’s cities just beyond the margin of productivity. Their land was cheap for productive urbanites whose comparative economic strength created massive incentives for suburban development—something which, to this day, remains the greatest threat to agrarian culture in the U.S. Our reliance on cheap land also drove massive environmental damage as we paved grasslands, drained swamps, and felled forests to replace it all with sprawling suburbs.
Now, those who would sell off federal lands would point to this history and suggest that this was the natural, free market response to rising urban productivity and populations. They may even suggest that selling off federal lands on the boundaries of America’s growing population centers will allow this process to repeat anew. However, they are wrong on both counts.
There was little in this cheap land grab that a bona fide free-marketer would be proud of. Not only was outward expansion subsidized by federal and state governments in the form of government-backed mortgages and homestead tax exemptions. But city governments passed laws and tax codes that limited development and encouraged speculation. These restrictions—invariably requested by existing property holders to protect their rents—created perverse market incentives that artificially constrained development where it would have been most productive.
There is also no reason to believe that selling off federal lands and attempting to repeat the post-war suburban land-grab will work again. There is a finite amount of land within a reasonable distance the cities and towns in which people work and it’s likely that we’ve nearly exhausted that range in many of our biggest cities already. The margin of production can only extend so far before the limits of human endurance are reached. At some point we can’t just build out, we must also build up.
Until we learn to recognize the value in the land already in private hands—and to tax that value in such a way that we encourage efficient development and deter speculation—there is little good that can come from the sale of federal lands. So, I congratulate Mr. Donway on his better argument, but I am not convinced.
About The Author
