In Part 1 I showed how land value exists by using the example of a body of water.  MW rhetorically raised the question of an urban setting and then answered his own question by verbally drawing an identical diagram using a town centre as the ‘feature’ – represented in my diagram by a castle! 😀

Urban settings are more complex and so have more factors contributing to an individual site value, but the principle still holds

The thing to note in understanding urban land value is that *people* create land value that accrues to others when they act economically.  Being a worker or building a factory makes it desirable for other people to use the space around you either for serving your needs or utilising your abilities.  Of course if someone is given absolute right to control that space and charge for it’s use, than the land value goes to them, even though there is no requirement for them to actually do anything to create the value.  Thus the idea of economic rent and the principles upon which it is distributed are perfectly at home in the concrete jungle, it’s just the source that’s different.

There are a couple of red herrings that need to be dealt with when discussing urban land value.  This from Paul Birch:

It should thus be apparent why Georgists wish to capture site value for the community; it is a windfall to property owners resulting from the activities of other people. However, that windfall has not been created by the common activities of the community, but specifically by the other properties in the vicinity. Each property contributes externalities to the other properties as well as receiving externalities from them. Each property contributes to the site value of all other properties. On average, properties contribute just as much as they receive. Georgists ignore this side of the equation.

Let the contribution of property i to the value of property j be Eij. Let the full value of property i be Vi and the site value Si. Let its net windfall be Wi. Then:

Vi = Sum{Eij, all j}
Si = Sum{Eij, all j not equal to i} = ViEii
Wi = SiSum{Eji, all j not equal to i} = Sum{(Eij Eji), all j not equal to i} = Sum{(Eij Eji), all j}
Sum{Wi, all i} = Sum{Sum{(Eij Eji), all i} , all j} = 0

Yes, *on average*, because land value is a zero-sum game, but we knew that already. All this equation states is that any land value generated at a particular site will be received by another site.  It says nothing about how such value is ultimately distributed.  There is plenty of scope in the equation for a single site to receive all the value:

W_{0} = \sum_{i=1}^{n}E_{ij}, all j not equal to i

is a perfectly possible result from the equation.  There is no requirement that each individual plot contributes and receives equally.  That’s not what zero-sum means.

Take a derelict warehouse on an otherwise busy industrial estate.  You’d be hard pressed to find someone who would consider the presence of the derelict building a contributor to land value.  Indeed, you would expect that it would actually detract from land values.  However, the rest of the industrial estate, the infrastructure, the working population available nearby, all contribute to the value of that land, even though what’s on that land is detrimental to other people’s land value.  How is this so? Because land value is based on what *could* take place on a site, not what *is* taking place there.  If there are available workers and a demand for some good or service that could be provided on that site, then that site has value, which the owner has done nothing to create.

But this is really the nub.  Arguments about whether value is applied to *sites* equally or not are entirely beside the point.  The point is *who* is receiving that value, and how is it justified?  Anyway…

Now let’s have the owner build a factory, which increases the employment opportunities for the area.  How does this equation fit with that scenario?  The contributions to the factory site value have not increased, but the site’s contribution to others’ value has.  However, the equation is only interested in the total of *net* contributions so it tells us nothing of use to anybody.  It is merely an accounting identity.

Then there is this more recently from a blogger known as will:

this is what I cant understand about the reciprocity demanded by lvt proponents. Unless lvt is going to exist in a world of state provided services what is the justification for the ‘location rent’ component? If the office building benefits from drainage services and the owners of the building are voluntarily paying the private drainage providers then why should they owe the state or society anything? Any and all direct services will have been voluntarily paid for and any indirect value from location and proximity will be a component of the market price of the building.

There is an element of truth to this.  If tenure on a piece of land has *free/subsidised, bundled* access to a given service, then the value of that bundling will be added to the value of the land.  However, just having physical access (even if you then have to pay for the service itself) is still of value in and of itself.  The best example of this is transportation networks.  People will pay to be located near a train station, even though they will gain no concession on the price of a ticket by doing so.  Again, the owner of the land did not build the train station, but receives benefits by it’s existence utterly regardless of whether the railway is privately built/run or not!

This idea that private infrastructure does away with unearned land values is utterly wrong.  No matter who builds something useful and no matter how the service is charged for, people will still compete to be near services because only so many people can be.

Again, it’s all about the geometry.  You ignore it at your intellectual peril.

Finally, as promised, a comment on more of Eachran’s wild mutterings:

Price differences are more the results of accumulated endeavours, including laws successful at controlling anti-social behavior, to create that better life. To the extent that the endeavour succeeds then these locations are models for the rest : if you tax them then you start to undermine one of the objectives for a successful society – a secure and agreeable living space.

You could sort of see his point, if not for the fact that rent exists whether it is taxed or not, because the only effect of a tax on rent is to make the government landlord, which in reality it already is.  What people consistently fail to understand is that ground rent is itself *the* tax on a secure and agreeable living space.  People are being thus taxed *right now* regardless of what the government does or does not tax later.  Rent *always* exists, and the only question is who gets to do the taxing.  If the answer is ‘the government’, it’s called LVT.

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