Georgist Macro-Economics and the Land Value Tax

October 18, 2016

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The ideas of Henry George are still very relevant for economic theory. A site value tax would help to stabilise property market cycles and promote greater spatial efficiency. However, while helpful, market mechanisms like a site value tax will not, on its own, fully resolve the environmental crisis.

Why the real estate market plays an integral role in macro-economic conditions

Given the way that land was dismissed out of the theory, including in the writings of John Maynard Keynes, it was not that surprising that it has been left to a few economists working in the Georgist tradition to explore and unravel the interplay between the banking system and the real estate, housing and land markets in the explanation of the economic cycle. For example, (Harrison, 2005) and (Anderson, 2009)

The link between real estate and finance is clear and obvious. A great deal of the collateral underpinning bank lending is real estate and housing. In the UK about 70% of bank collateral is tied up in this way, with a similar large proportion in many other industrial countries. It is therefore not surprising that there is a close relationship between the economic cycle in the real estate market and financial crises.

Because it is “embodied”, any form of economic development has a spatial dimension. It “takes PLACE”. Economic development involves the need for locations – for factories, offices, roads, railways and housing. Some sites emerge as particularly favourable – particularly when opened up by infrastructure investment – often paid for by taxes. The wonder of the market economy is claimed to be that if prices signal that something is profitable more of that thing will be created. But you cannot increase the amount of land, and each location is always unique. So, during economic development booms, the land price soars in specific locations (the capitalised rents for owning particular locations). Recognising which locations to get hold of is a way of making a lot of money. You do this by getting credit to buy up land and property and then persuading politicians to spend tax money on infrastructure to boost the value of the purchased locations.

Tycoons can make serious money like this – as long as landowners can ensure that the value that they capture remains untaxed. A modern day example can make this point clearer. London’s extension of the Jubilee Tube Line to Canary Wharf cost £3.5 billion but increased property values by an estimated £13 billion along the route. Landowners did nothing to earn this windfall except owning the land. (TransportforLondon, 2004)

So who does create this rising value of land? What people are prepared to pay for a location reflects the value of adjacent amenities which are either public goods financed out of taxes or advantages created by the surrounding population living there, for example, social networks; a rich job market; services and cultural activities. These collective amenities incur costs and need to be maintained so it is only fair that the landowners should pay for them in taxation. When no taxation occurs, landowners get the desirable features for free and someone else pays, wealth is transferred into landowner pockets – as well as enriching the banking sector. (Lyons, 2012, p. 104)

The chief economics commentator for the Financial Times, Martin Wolf, put it succinctly when he described the gains made by landowners, as “the reward of owning a location that the efforts of others have made valuable”

Property market cycles and their bubbles

By making money for themselves like this from other people’s efforts, the finance and real estate sector also seriously destabilise the economy. Property market cycles tend to be about 14 years in length. The long run rate of interest is about 5% and, bearing in mind the rent that people pay, affordable house prices work out at a sum which is equal to about 14 years in rent. If land, house and property prices are bid any higher, debts become unserviceable and the housing and property market grinds to a halt.

Economic cycles tend to end in “bubbles”. The rising price of particular classes of assets like land or property creates a collective euphoria or mania. People borrow to buy this asset, or invest all their savings in it on the anticipation that they will make more money as its price continues to rise. Their credit inflated purchases chase up the price until the price of the asset and the servicing of debt become unsustainable. Confidence falters and the crash occurs. The big money is to be made by getting in a bubble early and getting out early. Banks are left with debtors who have lost money and cannot pay up who then have the collateral seized from them.

None of this would happen if the original idea of the Physiocrats, Smith, Ricardo and George had come to pass – that the landowners forfeit the rising land values (capitalised rental values) through a tax. A land value tax would remove the incentive for land price speculation pumped up by bank credit creation. There would be no point in speculation because gains would go to the taxpayer. There would be no point in buying and hoarding land and then leaving it unused, on the anticipation that its value will rise. Hoarded land would have to pay tax, and if it was unused, it would still pay a tax, thus, speculative holding of idle land would lead to loss. A site value tax would release land onto the market and actually bring down land prices.

Spatial inefficiency

The failure to impose a site value tax has far reaching knock-on consequences for the natural environment because of spatial inefficiency. If, for example, we look at Ireland we can see that the speculative property boom that led to the financial collapse of 2008 led to a lot of building that was never completed, as well as a dispersed settlement pattern that is very inefficient in the use of space, infrastructure and resources. In the absence of land value tax, the system of land planning was abused to zone inappropriate areas as development land. Rezoned land went up in price and was sold on to developers for a windfall profit in which local authorities revenues were also swollen. The resulting spatial allocation of building resources made no sense. Ireland is now one of the most car dependant societies in Europe. Spread out like this, many Irish people have a sedentary and car based lifestyle which is partly why 61% are overweight or obese. (Osbourne, 2012, p. 134)

This car use also generates greenhouse gases making Ireland vulnerable to oil depletion and rising fuel prices.

Had there been a site value tax, landowners would have had to pay for vacant sites as well as used ones. They would have had an incentive either to use empty urban spaces or sell these spaces to those who would use them. This would have protected the countryside by making urban sprawl unnecessary. Cities and towns would have used urban space more efficiently and compactly. The need to travel distances would have been reduced and more people would be able and willing to get around by foot or by bicycle.

Arguments like these are persuasive – they suggest that smart taxation will go some way to help resolve a number of serious economic, environmental and social problems. It is why it is so encouraging that, in late 2014, the Scottish government are considering land reform and measures such as a land value tax. (Hunter, J. Peacock P. Wightman, A. Foxley M. n.d.)

This has led some thinkers to conclude that if “land” (expanded as a concept category to mean all “natural resources”) is given a price, either as a tax, or through some other mechanism like auctioning permits to authorise natural resource use, then all will be well. Humanity will be able to resolve the environmental crisis solely with market mechanisms. In the next few chapters we will examine why it is not as simple as that because this is still framing human-nature interactions inside an anthropocentric view. If we frame things through markets driven by what humans find desirable we are still seeing nature as a “resource” which is only of instrumental value. This very reductionist, human centred attitude is itself a major part of the problem.

Photo credit; "By Lucius Kwok – Own work, CC BY 2.5,"

Brian Davey

I now live in Nottingham in semi-retirement. This means doing much the same as when I was 64 but with a state pension and tiny private pension as well. In 1970 I got a 1st in Economics at Nottingham University – and then in 1974 an M.Phil. for a thesis on a Marxist approach to the economic development of India. This led to a varied career working with mainly community projects both in the UK and abroad. In 2003 John Jopling of Feasta followed a suggestion of Richard Douthwaite's and invited me to a yearly group discussion by the sea – at Rossbeigh in Kerry. I have been going virtually every year since then and have spent much of my spare time involved in the ecological and economics discussions of Feasta, particularly in its climate work. After Richard's passing I stepped into part of a teaching role that he had had at Dublin City University teaching on a degree in Religion and Ecology. This teaching led, in turn, to this book.

Tags: economic rents, Henry George, land access