Land is the physical space within which economic activity takes place. In classical political economy (the predecessor to modem economics), land was understood to be one of the three factors of production, along with capital and labour. Throughout most of economic history the primary function of land was for agricultural production. But since the birth of modern capitalist economies other uses have become more predominant: such as manufacturing, public services and housing. And today, it is in the housing market that the economic function of land is most visible. The value of residential property has overtaken the value of land used for other purposes.
Rethinking the Economics of Land and Housing
Land has several unique features that differentiate it from the other two factors of production – capital and labour. Most obviously land is immobile and it is essential for life and all economic activity to take place. It can’t be moved from one place to another. And, as we cannot make any more of it, the supply of land is highly inelastic, if not fixed. These unique features determine much of the special economic functions of land. Notably, they are features that do not fit well into mainstream (neoclassical) economic models where the supply of commodities, labour and capital can easily adjust according to the demand for them and find an equilibrium price and quantity; Bur rather than adjust their models for chis reality, economics has neglected land or conflated it with other factors of production, most notably ‘capital’. This failure to distinguish between land and ‘capital’ as factors in the production process, in notions of ‘wealth’ and in national accounting is a major conceptual error in the evolution of economic theory.
Economic value of any piece of land determined by the uses it can be put to – farming, manufacturing, commerce etc. Supply of land is fixed, but uses of land aren’t. But in practice it is artificially fixed through regulation, which in turn determines the economic value of any piece of land. Economic value of these uses will vary not only with the natural features of the land, but with their geographic relationship to the rest of the economy. Fertile Field is obviously more valuable than a desert, but if fertile ground lies miles from people to farm, roads to carry to markets to consume its produce, it is less valuable than the one near a city with good transport connectivity. The old adage – location, location, location is the most important factor that determines land value, because everything else can be changed. Often a huge discrepancy is seen between the ‘replacement cost’ of a home calculated for insurance purposes and the actual market price it commands. The difference between the two can essentially be attributed to the value of the land in that particular location. locational value of land is also reflective of the level of wider economic activity in that area. Also, investment in infrastructure increases the value of land, which allows an increase in the range and quality of uses it can be put to. Land is permanent, controlling land is also a means of securing the economic value that holding it will provide in the future.
According to Thorsten Veblen (1899), landed property can also be seen as a ‘positional good’ which people use to demonstrate their social status. People will therefore be prepared to pay more for desirable locations than can be justified purely by rational economic calculations. Physical space is also highly desired and is subject to diminishing returns – as people get richer, they want more space. Estimates suggests that a 10% increase in incomes leads people to spend about 20% more space in houses and gardens (Cheshire and Sheppard, 1998). Land has a ‘high income-elasticity of demand’ – meaning people will stretch their incomes to consume it. This is why the rise of communications technology has not resulted in ‘the end of distance’ as some predicted, but has in fact driven the economic pre-eminence of a few cities that are best connected to the global economy and offer the best amenities for the knowledge workers and entrepreneurs of the digital economy. The scarcity of these locations has fed a long boom in the value of land in many developed Cities. The technological transformations may not have abolished the significance of land in the economy, but they have accelerated a shift in the relative economic importance of different land uses, which was already underway. The proportion of the total stock of wealth represented by housing has risen rapidly since the mid-twentieth century, while the value of agricultural land has dwindled to almost nothing as a share of GDP.
Source: Rethinking the Economics of Land and Housing Paperback – July 15, 2017, by Josh Ryan-Collins, Toby Lloyd and Laurie Macfarlane