Happy Tuesday! Today’s post comes to us from Stephen. Thank you so much, as always. Hope everyone is hanging in there.
Continuing our theme of the “factors of production” as described in basic economic theory and how it so oft confounds and befuddles the economically illiterate, one ought to contemplate the nature of land itself, from an economic perspective.
Just how important is land in economics? Well, the very name for the field of study being “economics” derives from a group of French philosophers, competitors of Adam Smith who were called “economists”, who espoused the belief that all factors of production, indeed all wealth, derived from the land possessed by the nation and that a nation’s true source of wealth came from the natural resources that nation commanded.
It is not quite as far-fetched as it might seem in an abstract manner, after all, labor, whether manpower, or horsepower in the 18th Century, is only sustainable based upon the ability to feed the people; further, as capital is by it’s nature produced by the laborers. So it can be said that capital derives from labor just as labor derives land, making land the source of all wealth of a nation.
Neither is this perspective a stretch in the historical context, as every empire ever in existence derives first from a plentiful food source which sustained sufficient population to drive the expansion of the nation.
The price of the use of land is called rent, just as profit is the benefit from capital, rent is a comparable benefit of the employment of land. Although sometimes rent was paid in a set sum of money, i.e. “money rent”, the most common form of rent was called “corn rent” which often took the form of a portion of the crops grown upon the property rented, typically about 50%.
“Corn”, if you are unfamiliar was not then what we think of as “corn” now which is more properly called “maize”, but corn was a generic term like grain or cereal, and referred to any type of grass type seed grown to be used as food such as: wheat, oats, barley, rye, maize, or even millet. However, when referring to “corn rents” it referred to more generally any rent paid as an in-kind payment, such as the early farmers in Virginia paying their rent and even their taxes in tobacco. (“Cereal”, amusingly enough derives from the name of the goddess of the harvest Ceres.)
In fact, the entire agrarian feudal society was built around the ownership and leasing of land for the feudal obligation, the “feu” or rent paid for the use of the land. Rent in the feudal era was the way that the nation sustained itself, paid the soldiers, administrators, and so forth. The king owned all of the land, then he would lease it, grant an estate in it, to the lords, who would in turn lease out the land to the people under them, and so forth in exchange for the provisions of food, money, or even men-at-arms.
It was so important to the feudal way of life that it got the designation of “real” as in “real estate” or “real property” so as to distinguish land from other forms of property such as furniture, tools, or even coins which were considered less “real” because they did not produce the essentials of life, i.e. to grow things.
Adam Smith talked extensively about the contrast of money rents to corn rents and how the amounts in real terms had changed over the preceding century due to the sudden influx of silver from the Spanish colonies in the new world, which had created a fairly substantial inflation so that those obligated to pay their rents in coin were now paying far less rent as a percentage of their crops compared to those who were still obligated under the corn rents.
Of course, if wealth really derived primarily from the value of the land, France should have been the most powerful nation in Europe, having the most fertile land and ideal climate. On the other hand they did seem to have a lot of people to sustain many conflicts throughout the years, as a character in that Tolstoy novel put it, “Don’t worry, there will always be plenty of Frenchmen.”
(On the other hand, if money were the source of a nation’s wealth then Spain ought to have been the most powerful nation in Europe, and they did purchase a lot of ships for that nice armada, but it was not sustainable without better land and industry.)
Understanding economics requires us to think of things on a more abstract level than simply farms sustaining people. Land is not merely land, but a category better described as tangible resources, which would include mineral deposits such as gold, silver, copper, tin, iron, coal, oil, uranium, and so forth.
These resources can be used to create things, or they can simply be sold to other people who desire them, these are often called “extraction” industries as they simply extract the resources and sell them on the open market.
You can see why the concept of the ownership of land, of resources, just as the ownership of capital, can be an important philosophical foundation for a society. Who owns the resource? Who has the “right” (not quite the correct word) to exploit it? (Exploit, contrary to the socialists’ perversion of the word simply means to use or employ, whether referring to a resource or to labor, and not the derogatory connotation of abuse they so often imagine.)
One must consider the increased efficiency of the individual ownership of land, compared to the temporary use of the land and then as compared to what economists call “the problem of the commons”.
The commons was land in the medieval village which was open to the use of all persons as compared to the land that the peasant farmer rented from their lord, versus that property in which the farmer was himself seized, or owned. Without getting into the long involved history of the development of English property titles, let us simply discuss three types of ownership.
The problem of the commons was simply that while any person might gain advantage from using the property, no one person really benefitted from taking their own time and effort to improve or maintain the property that other people were also using, thus no body bothered to fertilize the commons and it quickly became overworked and neglected.
On the other hand, the tenant farmer had reason to maintain that property he was assigned because part of everything he grew was his to keep, but since there was no guarantee that he would be assigned the same plot of land to farm the following year, there was no incentive for him to improve the property. If anyone was going to improve the property it should be the owner of that property, in this case the lord from whom the peasant was renting.
Finally, a person which owns his own land has cause to improve the property because the more productive the property became the better off the owner of that land would become. The value of the land goes with the condition of the property.
In modern times this describes the comparison of home ownership to rental property to public housing. The home owner has incentive to maintain and improve his property, the renter really doesn’t and it falls upon the landlord who is reluctant to invest too much in rental property lest it be abused or destroyed, then there is the public housing which neither the tenant nor the owner, the government, has much incentive at all to maintain the property.
It brings to mind a situation in the country of Malaysia where the Muslim controlled government in the sough contracted to have the forests in the non-Muslim northern part of the country clear cut for profit which resulted after the seasonal rains in catastrophic mud-slides and environmental damage. Of course some people blamed the “capitalist” contractors for the disaster, while ignoring the real cause of the disaster being the government ownership of the land and the resulting indifference to the consequences to the long term value of the property contrary to the local, individual ownership of the property as in our traditional English system.
England possessed the profound influence of the world’s most advanced legal system with regard to property ownership and the recognizing publicly recorded deed instruments which had been in continual development and refinement since the Doomsday Book, which immeasurably advanced every British colony.
It is not an accident that every British colony became more developed, industrialized, modern, prosperous, and wealthy than the competing colonies of other European nations. Peruvian economist Hernandez de Soto has made great strides in alleviating poverty in many third world nations by pushing for property law reformation centered around deed issuance and recordation.
No discussion of land would be meaningful if it did not explore things tangential to or touching upon the nature of land as an economic concept.
In law there is a quaint esoteric phrase referring to things “sounding in realty.” An eloquent phrase coming down from the medieval legal jargon which is quite often lost upon the modern eardrums. That which “sounds in realty” involves those things which are attached to the real property, but can be severed from it thus becoming personal property.
For example, coal in the ground is real property, but once it is dug up and put in a cart, it becomes personal property, no longer part of the land. The same goes for the wheat in the field, or the trees in the forest, they grow from the land but change from being part of the land to being personal property once they are severed from the land.
(Failure to understand this phrase caused the legislature of WV to turn a felony into a misdemeanor, but then the police took it upon themselves to decide that such form of theft is a civil matter not a crime so it doesn’t matter what the legislature said anyway.)
So when assigning property ownership, land being solid, both tangible and stationary, is fairly straight forward, however one must consider the legal and philosophical implications of other resources which pass over or through the land, particularly liquids and gases.
Who owns the water, the person who owns the land or the state? This is currently a very contentious issue and potentially extremely important. There are states claiming the rain which falls upon the land, to levy taxes for dealing with the landowner’s water runoff or even fining the landowner for using the water God permitted to fall upon their land.
When the water is essentially unowned, available to all, then we can be back into a similar situation to “the problem of the commons” such as the situation of rivers which are available to use and may be overused or polluted because people care about the quality of water coming from upstream but suffer no consequences to the problems downstream.
Considerations of water usage become more important the more scarce the water becomes, and by that we must consider available potable water as the world is about two-thirds covered in water, but that’s not drinkable, nor readily available in some locations.
The perspectives in the semi-arid towns, farms, and ranches in the western part of the country are far different than the flood prone eastern part of the country where too much water and too much rain is more likely to be the problem than not enough.
Then, as opposed to surface water, there is the consideration of the use of such things as aquifers which like rivers cross state and sometimes national boundaries, but like the problem of the commons can be an exhaustible and limited resource almost like oil.
Much of this involves economic questions of the use, and more importantly ownership of resources which many people don’t even know to ask the right questions, much less seek the correct answers. The economic conception of “land”, of property interest, of ownership, in available resources is as fundamental politically and philosophically as the other factors of production.
Resources alone does not make a nation strong or healthy, just look at oil rich nations like Iran or Venezuela, or in Adam Smith’s day the gold and silver pouring into Spain from their colonies, which create a superficial wealth but those nations lacked the ability to use and employ those resources.
It has often been attributed by some that America is a wealthy nation because it was blessed with an abundance of natural resources, but Japan became a wealth nation despite its lack of resources and Russia is a poorer nation than America despite having more resources.
Land, a.k.a. resources, is only on factor of a healthy economy and while valuable and helpful it is always only part of the economic story of a nation. It is often used as a smokescreen to hide failed economic policies behind the lack of this or that, and if only we had such we would be as well off as that nation over there.
