Mark Wadsworth points out a rather bizarre comment on a piece on the Guardian website recently about Land Value Tax.  Bizarre doesn’t really cut it quite frankly, but it’s an example of just how wrong people can be!

The main rather astounding claim made by ‘Eachran’ (if that is his real name 😉 ) is that

Rent? It doesn’t exist and neither does land value except in fantasy economics and accounting.

<Sigh> Really? I mean come on….seriously?!  What is wrong with these people?

Fine, I guess I’ll explain to everyone how ‘economic rent’/land value actually *does* exist.  I’ll even draw some helpful pictures! We’ll start with the one purely theoretical situation in which there is no such thing as land value/rent. Consider the following unending field:

Every section of this field is the same, so who cares who gets which bit?

The hexes represent how much land the average person can consistently farm and in this fictional world is considered the standard unit of land allocation.  We won’t worry about how people get to and from their individual bits of land for this exercise.

If you’re trying to decide how bits of land get assigned to people, on what principle could you do it?  In this example it really doesn’t matter since whichever piece of land you get, it’s no different to anyone elses.  There’s no advantage from being in any particular location.  This is what drives land value – the advantage that arises from being in a particular location.

So let’s add an advantage, in fact let’s add something totally necessary.  A reason that the above situation can never be seen in the real world.  Water.

Land value changes with distance from the advantage - in this case water

We need water to survive.  It’s that simple.  It’s why historically just about every settlement ever founded starts near a fresh water supply.  For thousands of years people carried water by hand to wherever it was needed.  This gives an advantage to those whose plots are nearest the water source because it takes them less time and effort to get water.  Note that this advantage is continuous – as long as the water doesn’t somehow move, these plots continue to have this advantage day after day, year after year.  Those who work these plots get a lot of extra time to play with.  In other words they can get more done.

Clearly, all else being equal, everyone wants to have a plot in band 1.  But there’s only 6 such plots.  Not a problem if there are only 6 people, but as soon as there’s a 7th, someone loses out.  Here is the fundamental principle behind land value.

If  a location receives a benefit and there is a limit to the number of people who can receive an equal benefit which is lower than the number of people who *want* to receive that benefit, than the locations that *do* receive that benefit are valuable.

This value (measured per unit area) increases as the value of the advantage itself does, and decreases as the number of people who are able to receive that advantage equally increases. Band 1 has 6 plots while band 2 has 12 plots with band 3 having 18 plots.  Thus although value is reduced in band 2 due to the increased distance from water, it is also reduced because there are more locations with an equal benefit.  Thus as you go further from the centre, the value in each band falls off rapidly.

To show this last point consider:

If more people can fit round a resource, the value of each band is reduced

In this situation, the original band 1 also contains water so each band can have more occupants.  This reduces the value per unit area as more people are able to utilise the resource at each level of advantage (there is more area with the same advantage).  It is important to recognise that the advantage is *relative*.  The advantage of band 1 (being at the water’s edge) is the same as it was in the previous layout, but because more people can have that benefit the resulting value once people must compete is reduced accordingly.  This also means that as bands are added, the value of each existing band increases further depending on how many slots are in each band.  Bands 1 & 2 instantly become more valuable when band 4 comes into use and band 3 becomes valuable.

In the real world of course there isn’t just one resource or feature that people want to be near.  Also people can have differing requirements.  None of this is really important to the principle.  As long as there is something that people want to be near, there will be competition to be the closest to it.  Land value *is* that competition.

Eachran makes one other dubious claim, which is that a tax on land values

undermine[s] one of the objectives for a successful society – a secure and agreeable living space.

I’ll deal with that one in part 2.

PS – there’s one other thing about Eachran’s comment that bugs me:

There are reasons for price differences with respect to land, sometimes the reasons are hard to determine particularly if feedback loops are involved, but they are currently accepted as having social legitimacy and if they have social legitimacy then they are neither rent nor surplus.

Rent is a function of physics, not of social legitimacy.  Whoever gets Band 1 land has the advantage, that is the rent.  How socially you determine who has that advantage is irrelevant to whether that advantage exists or not.