In Part 2, we observed that LVT has the effect of disincentivising land speculators from seeking new opportunities in the land, but left open the question of whether land-users themselves would be equally discouraged. To determine whether this is the case, we need to go back to what happens in production.
Factors of Production
A man cannot produce anything without the cooperation of original land, if only as standing room. A man cannot produce anything by his labor alone. He must mix his labor with original land, as standing room and as raw materials to be transformed into more valuable products.
In order to produce there must typically be three things:
- Someone to perform the production (Labour)
- Raw materials and a place to work in (Land)
- (Usually) Additional tools or preparation that makes the act of production either easier or, as production becomes more advanced, possible at all (Capital)
It’s important to note that all these are time dependent. As Labour applies itself to Land using Capital for longer, more is produced (either in terms of quantity or quality, it applies to both).
These requirements apply regardless of what form your ‘production’ takes. If you are a writer, you need somewhere to write, maybe even places to go to be inspired. You need something to write on and probably reference materials. Finally, you need to actually take the time to sit down and write the darn thing! Note however, that all these things need to be available at the same time. You can’t take the time to sit down and write the darn thing, if you have nowhere to sit and nothing to write on.
Each of these ‘factors of production’ receives a payment for its services, its contribution to the production process. However, in the initial analysis, this payment is not monetary. The payment to all three factors for its contribution to production is the result of that production; in this case, the finished manuscript. If any of the factors was missing, production would not happen. In monetary terms, payments are made to each factor to bring that factor into use.
These payments are typically not synchronous. Rent often needs to paid before you are permitted to begin and you can’t start writing until you’ve bought a pen, while the writer often sees no money until the work is published. The point I’m trying to make is that while it’s possible for land (like labour or capital) to be priced out of use, the payment of rent happens as natural part of production, and while it’s a point I’ve made before, it is a strange idea that the identity of the recipient of rent should be thought to be so destructive to the process of production.
The fundamental principle of human action — the law that is to political economy what the law of gravitation is to physics — is that men seek to gratify their desires with the least exertion.
What none of this speaks to, however, is why the writer is writing at all. Writing takes time and effort, that could be spent doing other things. There are two possible reasons (which are strictly speaking not mutually-exclusive):
- Personal enjoyment. (The writer really really really likes the idea of having written a book, whether or not anyone else ever reads it.)
- Trade. (The writer needs something he can exchange for some food or some other thing he can’t really get by his own efforts.)
We should note here that people’s personal requirements tend to be self-renewing. Food only sustains us for so long. Having a place to sleep tonight doesn’t stop us needing a place to sleep tomorrow night. Having read a book last year doesn’t stop us being bored right now. Production needs to be continued or we cease to be, and this is before we consider population growth.
With this background, it is easier to see why a producer-directed model will exhibit searching. The most obvious case is when the production in question is the extraction of raw materials. At any given moment, the operation will have knowledge of a certain amount of material in the site. As extraction continues, the amount of material known to be on-site will diminish. This places a limit on the labour and capital that can be usefully employed in the extraction, as once there is nothing more to dig out, then it is a waste of resources to have people turn up and use machines and not have anything useful at the end of it. However, if a further discovery of material is made, then extraction can continue that much longer, which means the producer is in business that much longer. The incentive to search does not require the value of what is found, but rather the opportunity to use it in production.
“But what about the now higher LVT?”, I hear you cry. This is the more profound result of the producer-directed model. When a land speculator finds additional materials and then sells the plot at a higher price, he is selling the rights to the extended extraction time all at once. Producers in an LVT setup, on the other hand, upon finding additional materals are now in a position to continue paying LVT as they are able to utilise the site past the time they originally expected. Importantly, because LVT is paid as a rental rate as the site is used, the ‘increase in value’ is paid for by the very act of using the time the new discovery permits. There is actually no fundamental need for the rental rate to increase at all! This is why the authors redefinition of ground rent to use an NPV criteria was inadvisable – it masks the time-continous nature of the production that is necessary to gain the hypothetical income.
“But don’t the extractors need the value of the materials to justify putting in the effort to extract?” No. As in any other line of business, producers are perfectly willing to pay rent so that they may have the opportunity to produce (and thus receive their wages and interest), because the alternative is to not produce (and thus not receive wages and interest). The sale price achieved of a resource consists of not just the value of the resource itself but also of getting that resource to the buyer (and all that that entails, from planning to extraction to distribution). All actors that contribute to that value are paid for that contribution. Producers, by definition, do not need the rent to incite them to produce.