Category: Geonomics


Saruman_Chosen

How half the country will feel in 48 hours

I’d been meaning to make this post ages ago, and have it all complete and referenced and linked and stuff, but, as usual, I delayed and procrastinated and now the time has run out, so this will have to do.

So tomorrow is the UK’s referendum on its membership of the European Union.  Many I think, me included, will in part breathe a sigh of relief when it’s all overThat said, I do think this is a significant decision, so I think I feel I have a duty to make my position plain as I actually think this is just the beginning, whichever way the referendum itself goes:

  • Why this decision needs a referendum

There has been some talk that this decision should never have been put to a referendum at all.  The most famous example of this is, I think, by Richard Dawkins, and it exemplifies one of the great misunderstandings about what it is we’re actually voting about.  His appeal that lacking a degree in economics or history somehow disqualifies his views is based on the assumption that we’re making an exclusively economic or historic (whatever that’s meant to mean) decision.  It is not.

This is a question that has broad ramifications for who has ultimate decision-making authority for the UK.  A referendum on such an issue is the very essence of ‘Consent of the Governed’, and the idea that it’s a decision for our ‘betters’ (with tongue-firmly-in-cheek) is as anti-democratic a notion as I can think of.

  • The campaigns

Oh my word, kill me now!  I thought referendum campaigns couldn’t get much worse than the AV referendum, but yet again I underestimated the political class.  From everything getting compared to Hitler at some point, to the scaremongering (either of the risks of leaving or the threat of immigrants), to the dodgy numbers (£350m anyone?) to the petty personal politics – we are not voting on whether Boris Johnson should be Prime Minister, people! – the media campaigns have been appalling.

And then there’s the tragedy…:-(

I have to say, though, I’ve been impressed, for the most part, with my social media friends on all sides who have, for the most part, honestly tried to grapple with the issues and, also for the most part, kept it cordial.  In or Out, if we are to survive as a nation, this is a skill that must never be lost.

  • The economics

I’m just gonna come out and say this and you can judge me if you want: No, I don’t take the prognostications of a profession that specialises in being wrong seriously.  What sort of a silly question is that?  More seriously, leaving aside the issue of the strange assumptions that all these doom-laden forecasts have been based on, there’s a strange sense of deja-vu about having a large swathe of economists recommend a course of action with regards to Europe.  Quite simply, the track-record isn’t great.  Common-sense credibility is in short supply…

That’s not to say there aren’t risks associated with a Brexit, but they mostly stem from the idea that the rest of the EU is more interested in ‘making an example’ of Britain than the welfare of their own citizens (which is a topic I’m going to leave to last).

  • Immigration

I’m only going to make one observation here, and it’s a more broad point really.  There’s much hand-wringing over attitudes to immigration, and certainly there is some justification in that and a desire to change it, but a word of caution.  You can’t enforce friendship with the sword.  The idea that political unity overcomes cultural divides is, I think, a dangerously wrong idea.  Wrong, because it ignores the limits of democratic legitimacy, and dangerous because it predisposes political discourse to grant greater and greater powers to government in an attempt to solve a problem that, in fact, it is incapable of solving.

The other caution is that it does not help the cause of anti-racism to conflate immigration concerns with racism.  This has been an issue in political discourse for a long time and is counter-productive.  It may make you feel good, but its main effect is to delegitimise the voices of those with genuine grievance and as Kennedy said “Those who make peaceful revolution impossible will make violent revolution inevitable.”  Maybe not quite so extreme as that, but hopefully you get my point.

  • Democracy and scope of government

If there’s one thing that I think the Eurozone debacle shows, it’s that the kind of halfway house between a federation and a loose association of nation states that currently exists is unworkable.  The traditional EU answer to any such difficulty has always been ‘more and bigger’, and I don’t see much evidence of that changing (with the possible exception of Donald Tusks recent comments – probably sparked by what he sees as the end of Western Civilisation; no, that’s not an exaggeration, that’s actually what he said!!)

I’m of a different opinion.  I think historical experience has shown that there are natural limits to the size and scope of legitimate governments and I think the EU is quickly exceeding them.  It’s not even about the way the EU is structured, although I think there are serious problems there.  You simply reach a point where things become too large and cover too many people to be either wieldy or meaningfully representative.

People have been talking about the risks of Brexit, but I don’t see how remaining in this structure is a particularly safe choice.

  • Democratic Deficit

To me though, the main problem in terms of representation in Europe is the way our national government interacts with it.  I really could have done with starting this post earlier to try and explain this better but here goes.

The phrase that I remember hearing most from my Uni days whenever I heard parliamentary debates was something along the lines of ‘we have to do this because it’s an EU directive’.  It seems the truth is that the government was totally happy at the EU level to make these directives and then ‘play dumb’ before their own parliament.  It is this, more than anything that makes this referendum a valid one for me, because governmental structures matter, and they matter because the form absolutely affects the function.

The sad truth is that I think successive governments support the EU because it makes their own lives easier.  It gives them a bogeyman to deflect blame onto, while they actually get what they want regardless of the public, and that is not a situation I want our own politicians to be able to exploit, and I don’t believe it can meaningfully change while we are part of the EU.

  • A vision of the future

While I think it’s meaningless to ask the Leave campaign as a whole for it’s vision of the UKs future relationship, it’s certainly valid to ask individuals what they are hoping for.  So what am I hoping for?  I mean, apart from the obvious pipedreams.

First, I think I’d be okay with the EEA option as a good compromise position, or something approximating it, and I certainly think it’s possible to achieve.  It takes us out of the more obviously damaging parts of EU law (like the CAP and VAT harmonization), while giving much more scope in our own affairs, but to be honest, I actually think the hard work in British politics only begins with a Brexit.  As many on the Remain have rightly pointed out, many of our problems are actually self-inflicted, but I think they misunderstand the remedy.  I think our biggest problem is that we no longer really know where ultimate responsiblity lies, and as long as that’s true, politicians will do what suits them, and cover for each other if it helps them.

What happens next though, depends very much on us, we will be left without excuse, but I will be voting Leave because I have faith that my fellow Britons are up to the task.  Even if you think this Tory government is terrible (and I wouldn’t even say you’re wrong), you’re still looking at 2 years before Brexit would actually happen and then we’re in election season.  You’re not giving Cameron (or Johnson or whoever) free reign here.

  • Malicious Lunatics?

…and if it turns out that the rest of the EU are hell-bent on making ‘an example’ of us?  That they would rather burn Europe to the ground than admit that a giant supra-national government actually isn’t that great of an idea?  All the more reason to get out now.  If the lunatics really are in charge of the asylum, they can do far worse to you if you stay than if you go.

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Soooo…..General Election tomorrow…

I spent today looking at manifestos. It hasn’t helped much – although I’m intrigued to know how the Tories got Nicole Kidman to pose for theirs (page 10 btw) – and neither does the knowledge that Alistair Burt has essentially already won this seat.  Don’t worry, I’ll still be down the polling station in the morning, but a spoiled ballot is still the most likely outcome.

I sometimes wonder if the only way to find a candidate I’d vote for is to become one.  That thought is still a long way off overcoming the primal sense of ickiness I have about election campaigning and the way politicians inevitably wind up speaking about things.

Anyhoo, what actually moved me to post tonight was a Facebook comment on the LVT group about this article:

It is also the case that a lot of the chronically homeless have substance abuse issues or mental health issues which may be improved by Housing First.

But interestingly, when there’s no free land, the general rate of wages is determined by a bit of a race to the bottom.

Consider the Irish potato famine. The Irish didn’t merely choose to eat only potatoes. They were economizing in order to keep their heads above water in lieu of rack-rents.

And the more they economized, the more average disposable income was available. So once the practice catches on the landlords immediately raise the rent in response because they can. Just like they have in Silicon Valley and Williston North Dakota and anywhere else when average disposable income rises.

Thus, wages are in large part determined by how uneconomical people are.

If all the drug addicts in the world stopped wasting their money on drugs, they’d soon have to waste it on rent.

So thank every person with wasteful spending habits for keeping your rent low.

Smokers, gamblers, etc. Here’s to you.

The ‘lowest that workers will accept’ part of Ricardo’s Law has always been the vaguest part of it to me, but the statement “wages are in large part determined by how uneconomical people are” triggered a bit of a lightbulb moment.

Turns out the 2nd Law of Temping* has greater application than I first realised.

Yes, Wages can sometimes be higher because labourers simply cannot conceive of being paid less.  If they ever do find a way to make pay stretch better, the efficiency gains wind up in Rent eventually.  The faux-libs would normally claim victory at this point “See!! It’s all voluntary!! Stop being a statist, you filthy statist!”  They miss the point.  This behaviour is in response to an inequity, not a cause of an inequality.

So we can add ‘self-reliance’ to the list of things that the Law of Rent corrupts….

*Fraggle’s 2nd Law of Temping reads: There is no reward for Efficiency.

In thinking of the possibilities of social organization, we are apt to assume that greed is the strongest of human motives, and that systems of administration can be safely based only upon the idea that the fear of punishment is necessary to keep men honest — that selfish interests are always stronger than general interests. Nothing could be further from the truth.

From whence springs this lust for gain, to gratify which men tread everything pure and noble under their feet; to which they sacrifice all the higher possibilities of life; which converts civility into a hollow pretense, patriotism into a sham, and religion into hypocrisy; which makes so much of civilized existence an Ishmaelitish warfare, of which the weapons are cunning and fraud?

Does it not spring from the existence of want? Carlyle somewhere says that poverty is the hell of which the modern Englishman is most afraid. And he is right.

Henry George

A few days ago, Matt Walsh made a post on religious freedom that got a lot of comment.  I found that post didn’t sit right with me, as much as I could agree with the basic idea.  Eventually I realised that my issue was that discussing this as a question of religious freedom was the wrong framing.  This isn’t about people having the right to act on their beliefs, but rather about being able to choose who they will and will not associate with.  Fortunately, Walsh himself drew this conclusion the day after.  This follow-up post is much better in terms of drawing out a basic principle, and has some very basic, but forgotten truths.  My favourite being:

Now, instead of making this an argument about “gay rights” or “religious freedom,” I think it’s time to shift the discussion towards the broader concept of property rights, freedom of association, and free speech. That conversation got bogged down by people attempting to determine whether or not the photographer, the baker, the t-shirt maker, and the florist were “homophobic” or “bigoted.” But that isn’t the question. I don’t think they are bigots, but it doesn’t matter. Bigotry is not illegal. Hatred is not illegal. Racism is not illegal. These are spiritual crimes — problems of the heart. The government is not omniscient. It cannot possibly legislate our thoughts and emotions.

We will never be free as long as it keeps trying.

Freedom of association is fundamental to any free society, but fundamental to that freedom is its corollary: the freedom of disassociation.  Without that then you do not have freedom of association, as you are forced to associate, in whatever capacity.  You can no longer meaningfully choose who to have as friends, or who you will buy from, if those choices are made for you.

When stated in these terms, the freedom of association is well understood and defended (for the most part), but strangely not so when spoken of in terms of who we buy from.  We have established a notion that only one side of a trade has the right to decide if they want to be party to a transaction or not.  Does that not strike you as odd?  Indeed, the great irony is that almost invariably those who complain about some trader claiming a right to disassociate will then call on others to exercise their right to disassociate.  On its own, that would be entirely legitimate, but when doing so as part of an effort to get government to force said trader to transact, it becomes rank hypocrisy.

…….and yet……..

….and yet it’s worth asking how such a state of affairs could come about.  How have we come to view such a one-sided application of free association as the epitome of justice?  So much so that almost no-one will dare suggest anything different, except quibbling about in which rare instances a business will be allowed to assert their own will, and then have the audacity to call this state of affairs the ‘equal protection of the law’?

Those of you who’ve read some of this blog before will know where I’m going with this.  Anti-liberty philosophies require more than just words and activism to gain the levers of power.  The main ingredient is greivance.  There has to be something that the people can no longer stand.  Something so rotten within society that they will listen to anybody who claims to have a fix, no matter how wrong they are.

Greivance is what empowers the enemies of liberty, and the socialist narrative of capitalist exploitation drives the notion that businesses should not have the right to disassociate through the greivances of workers stemming at least as far back as the Victorian Era.  There’s a reason that the lasting cultural memory of the Industrial Revolution can be summed up in the word ‘Dickens’.

But what if the narrative was wrong?  What if it wasn’t capital that was the source of inequity in British society?  What if it was something more fundamental?  So fundamental, in fact, that today is actually no different from before?

And that’s where the titular home-owner-ism comes in.  It is not capital (or even money) that is the root issue here, but land.  When land can be bought and sold in perpetuity, then those who don’t have any are at the mercy of those who do.  If you are at the mercy of landowners, then it matters on what grounds they can refuse you access.  If every coffee shop then you can always make your own coffee (or even your own coffee shop!), but if every landowner refuses to let you use their land, then you literally have nowhere to stand.

With a Land Value Tax/Citizen’s Income setup, there is always somewhere to go, even if literally everyone else refuses to have anything to do with you.  You are no longer at anyone else’s mercy.  You may not be able to be precisely where you want to be (who really can?), but you can always be, and that is where freedom lies.

Don’t get me wrong, there are still consequences to being socially shunned. It is a big deal – but anyone who has ever called for a boycott of anything for any reason has no cause to complain.  After all, what else is a boycott but social shunning?  And who doesn’t use social means to influence people’s behaviour?  Indeed, how would any society function if you couldn’t?

Honestly, though, I don’t expect hardcore professional victims to care about this.  They’re having their time in the sun, but anyone who wants true freedom needs to understand that unless everybody gets it, no-one will.  Greivance will see to that.

We have the economy we deserve

This reminded me of a conversation I had earlier in the year with a recently retired gentleman.  He was reflecting on his life and remarked that things had worked out financially for him, and that his house is now worth somewhat more than what he paid for it.  To which I, of course, had to ask the obvious question:

“But where did that increase come from?”

“(Laughing) Who cares?”

And he’s not wrong…

The fundamental laws of thermodynamics will place fixed limits on technological innovation and human advancement.
In an isolated system entropy can only increase.
A species set on endless growth is…

Muse – The 2nd Law: Unsustainable

At this point I want to leave critiquing the paper and talk about something that’s crystallised in my mind as a result of this exercise.  I have to admit I’m kind of disappointed that I haven’t fully realised this until now.

As soon as you realise that from the producer’s perspective LVT already exists, following that trail of thought to its conclusion implies that most of the decisions producers now make wouldn’t be impacted at all, simply because their numbers don’t change.  They still pay Rent, they just change who they pay it to.

That’s both a good thing and a bad thing.  It’s good because a tax that changes production decisions is generally accepted as a bad thing, as the presence of this paper demonstrates.  It’s bad (at least, for those who think that we’re wasting our natural resources), because it wouldn’t affect those decisions either.  As I’ve mentioned, many governments already charge producers for the privilege of extracting fossil fuels and yet we’re still doing it at the rates that we are.  One of the assumptions of some environmental activists is that we abuse the planet as we do because the land doesn’t make us pay to use it, and that if we just charged people who used the earth then the problem would be solved.  Indeed there are environmentalists who support LVT for that very reason, but it seems people are charged to use the earth and it still happens.

So must we stop claiming that LVT would help in environmental matters?  Actually, no.  The most important of these shifts happens when LVT proceeds are used for current government spending, thus eliminating the need for other taxes.  When this abolition takes place, some interesting dynamic shifts happen.  Labour and Capital becomes more attractive as an input to production, relative to land.  At the moment, if there is a more labour-and-capital-intensive way of performing something that uses less space and resources, that method is penalised by the current tax system.  By allowing labour and capital back into production we not only increase production (and thus wealth), but we favour methods that are more resource-efficient, and we have more skilled people in a position to improve that efficiency through technological advancement.

The time will soon come (and maybe now is) when we will need everyone to put their heads together to find an alternative energy source to oil, yet we let much of our skills base wither on the vine.  We need to get cracking.

Another way that this helps is in housing.  A tax regime that favours land-use over labour/capital-use results in a sprawl of badly-built and badly allocated houses, as people only think about their spatial/locational needs when they buy the house, and may never revisit the topic.  Such homes are energy-expensive to maintain and difficult to service by mass transportation.  Tip the balance the other way, and you get a tighter spread of well-built homes that are traded more often and utilised more efficiently as people regularly reevaluate their spatial/locational needs.  Homes that don’t waste energy, and form communities that don’t need as much energy to commute to/from.

By not punishing the human input to endeavour, we remove many of the pressures that force people to rely on resource-expensive methods.  Then and only then, will you be able to really talk to them about ‘saving the world’.

Finally, there is one more thing to discuss, that of the previous rentiers.  In truth, while there are things that can be changed simply by levying LVT, in some ways it matters more what you do with the proceeds.  It’s important to remember that those proceeds have always existed, but up until now they have been funnelled to those to have title, and they decide what to spend it on.  What is important to them becomes important to the producers, because they have the money to pay for it.

Rents, when concentrated in the hands of few determine the course of an economy.  This is the root of distortion and is, to me, another reason for the Citizen’s Income.  For who really needs to be entrusted with the power of the rents, and ultimately who really can be?

Albert: I’m working on a new kind of music, mum!

Young Einstein

I think I’ve said all that needs to be said on the technical matters.  I want to spend a little time on the ‘meta’ issue of this working paper, as a paper.  I’m slightly concerned that this is what passes for academic discourse these days.  Now in saying that, I’m not claiming any special knowledge of a time when things were better – maybe it’s always been this bad – but several times in this paper, the authors throw in some – how shall we say? – frankly bizarre asides and decisions that have no place in a paper of this nature.  One that I’ve already mentioned is that they made no attempt to mathematicaly model rent, which was the thing they were supposed to be investigating.  Their model assumed their conclusion, and they then used it to claim their conclusion was valid.  No wonder they call it ‘the dismal science’…

Moving on from that, however, there are several other things in the paper that set off alarm bells, and in one particular case, cartoon-style klaxons.

Julian Simon (1998), noting that the very longest trends throughout humankinds history exhibit decreasing rather than increasing scarcity for nearly all raw materials, predicted the trend would continue indefinitely. The theoretical underpinning of this prediction is one of endogenous invention, and this invention must be sustained through the availability of quasi-rent and the preservation of property rights. It is through entrepreneurial discovery activity that the supply of resources has increased, driven by the incentive of quasi-rents from their sale.

Leaving aside Simon’s complete dismissal of the 2nd law of thermodynamics, how exactly does endogenous invention rely on quasi-rents from land searching?  Unless you are searching for some space in which inventors invent better, it’s the inventions that enable the improved searching and the utilisation of what they find, not the other way round.

Without this activity, it is conceivable that the doom-and-gloom forecasts of Simon’s day would have come true.

Now seems like a good point to mention that the idea of government charging for the use of natural resources is not exactly unheard of in the real world. It’s how sovereign wealth funds came about, after all.  All this decreasing scarcity and avoidance of the doomsday scenario has taken place even with governments often claiming ownership.

The developing world is using an increasing proportion of the worlds natural resources, and natural resource allocation between countries is often a source of extreme tension in international relations.

Stop War. Stop LVT. Won’t someone think of the children?!

A very high tax on the unimproved value of land could drastically interfere with the dynamic nature of entrepreneurial activity: developers must earn some minimum amount from the land to cover the enormous tax, therefore they will employ the land in its obvious use.

You have to love the hysteria leakage here.  They’ve tried so hard to be impassive and technical about this, but LVT’s just….so……enormous!  In any case, land-users don’t look at a plot and ask “What can I do here?”.  They decide what they want to do and ask “Where can I do it?”.  The incentive to search under LVT is obvious when you consider who actually directs economies.

We consider a shift in expectations that discourages investment in land even after the George tax is repealed. Now, when calculating the net present value of land, the buyer considers not only the tax rate for the current period but his expectation for the tax rate in future periods as well.

<sigh>  There is only one condition where you can, even in theory, make a logical argument from regime uncertainty.  That condition is that you counter-propose absolutely no changes to the status quo.  I have yet to see this done.  How will our intrepid authors fare?…

However, we…suggest that taxing of negative externalities (Pigou 1920, Baumol 1972) is plainly superior from an efficiency perspective.

Yeah….I thought as much….

Previous attempts at land reform have more often failed than not, sometimes with terrible consequences. Consider the case of Uganda, where in 1971 dictator Idi Amin expelled approximately 60,000 Indian immigrants and expropriated their land (Jorgensen 1981). The idea was simple: expel the immigrants and redistribute their holdings among the native population to curry favor without effecting future output.

<Klaxons sound> Erm……what?  Is this paper actually an elaborate prank? Am I on You’ve Been Framed/Candid Camera?  How is any of this relevant?  Progress and Poverty already has an entire section on why redistribution in this manner does not and cannot work.  How is the failure of something that George said wouldn’t work a useful marker for the validity of George’s proposal? What possible reason do the authors have for mentioning Amin, except as an attempt to discredit LVT by supposed association?

What’s most astonishing about this is that one of the authors must at some point have said to the other “You know what this needs? A discussion of Idi Amin’s expulsion of the Indians!” and that at that point the other failed to immediately slap his colleague with a fish and say “Whatever you’ve taken today, keep it far away from me!”

While a true comparative institutions approach is impossible because no country has attempted to follow Georges recommendations wholly, some countries have experimented with very high land taxes to tremendous detriment.

Astoundingly, this statement (which comes after the ‘Amin incident’) is followed by no further discussion of either any examples of countries that have experimented with very high land taxes, nor the tremendous detriment they suffered by doing so.  These are the sorts of things that you would expect a paper of this nature to be interested in exploring. Surely!

Not worth the paper

The introduction of this paper states:

This critique [of LVT] distinguishes itself from previous critiques by employing the language of modern economics.

Making such a claim sets you to a higher standard, which makes the dismal failure of this paper to say anything of value all the more disappointing.  The economics profession should stick to simply ignoring Henry George – it’s something they are at least half-competent at.

Go to Part 5

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.

Murray Rothbard

In order to produce there must typically be three things:

  1. Someone to perform the production (Labour)
  2. Raw materials and a place to work in (Land)
  3. (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.

First Cause

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.

Henry George – Progress and Poverty

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):

  1. Personal enjoyment.  (The writer really really really likes the idea of having written a book, whether or not anyone else ever reads it.)
  2. 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 allThis 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.

Go to Part 4

Concentrate!

Jennifer Aniston

(Part 1 is here)

In my school days my friends and I had a kind of running joke amongst us where the punchline was ‘Answer the question set!’ referring to the first challenge of any exam question, that of actually understanding what you’re being asked!  I feel our authors could have paid more attention to this concept…

 To be clear, when referring to “ground rent” in this paper we mean the net present value of the land devoid of physical improvements such as buildings.

Note we have not complicated the models by differentiating between improvements and the land’s “unimproved” value…

The first of these quotes is alarming.  Why the authors redefine ground rent to be something other than….well…..rent for ground, I have no idea (it certainly doesn’t help understand the topic at hand, as we’ll discover), and in particular, removing the time continuous nature of ground rent is just asking for trouble.  The second, however, is an insult to academics everywhere.  Heaven forbid a paper challenging the idea that land has unimproved value should stoop itself to actually modelling the thing it is challenging!  That just wouldn’t be cricket, what?!

If they are going to not bother actually doing what they said they would, they at least have a good reason, right?

The Logic

We consider the problem of a risk-neutral prospective purchaser of land who compares his opportunity cost to the value of some parcel:

        E(V) = E(I) − P                                      (1)

Where V is the lands value, E(I) is the expected income of the land, and P is the land’s price.

Note there are some assumptions that become evident here.  Pay attention to E(I), the expected income.  An important question to ask is ‘Where does this income come from?’.  Whatever it’s magnitude, and however accurate the expectation, it must have a source.  Caplan and Gochenour’s answer to this question limits their analysis.

Landowners will engage in costly search to discover more information about the land (Stigler 1960): for instance, if the land contains natural resources, or if the land can support a new type of building. Rather than think of natural resources as an inherent quality of the land, from an economic perspective it is more accurate to think of them as being produced through the process of discovery and efficient extraction. [emphasis added]

So we are all aware, this is the crux of the entire argument put forth by our authors.  This is what they’re trying to ‘prove’ so to speak; the basis for saying that LVT is distortionary.  This statement is rather easily dismissed, however, by considering that the value of performing a search depends greatly on what is there to be found and by definition you don’t know what’s there to be found until you look.  Thus, searching, like pretty much every other economic activity becomes more or less effective depending on where you search.

You can spend as long as you like searching a used ice-cream tub for some delicious vanilla goodness, but you’ll wind up disappointed.  Search the freezer aisles of Tesco, however, and it becomes a very simple, cheap and rewarding endeavour!  Which leads us back to the basic principle:  The extent that the effectiveness of an activity depends on where it is performed is the extent to which the more effective locations will charge for the privilege of their use.

As this is really the entirety of their argument, we could stop here…..but where’s the fun in that?! 😉

He searches for higher value uses for the land until the search costs exceed the expected benefits,

V = E[I(S)] − E[C(S)] − P                            (2)

Where E(I(S)) is the expected income for a given level of searching S > 0 and C(S) is the search cost.

Now we’ve added the costs and incomes arising from searching, the question of where the income comes from becomes ever more relevant.  Why is it that performing a search for greater capabilities of a given plot results in an expected increase in income from ownership?  A couple more quotes:

 Any “rent” that would accrue to the landowner after he discovers and brings to market any properties of the land are really a quasi-rent (Marshall 1920): while superficially similar to a rent, the reward of charging P > MC for, say, natural resources discovered on the land are a necessary incentive to search for these resources.

Since any resources found would be taxed at 100%, there is no benefit to
searching, and in equilibrium no search occurs and the price of land becomes
zero.

Hopefully by now you’ve seen the problem here. Caplan and Gochenour see the additional resources capabilities found as simply a thing to be sold on.  To them, the income comes from selling up.  There is no consideration of the actual process of production that must be employed to realise the discovered opportunities.

The authors are only considering one model of organisation, that of landlord-directed production and trade.  If all production and trade decisions are made by landlords, then taxing the value of the land does indeed leave the landlord with no incentive to get involved with production and trade, including seeking out new opportunities.  Searching for new capabilities of a plot is not unique in this context.

The landlord-directed model, however, is fallacious as I’ve discussed before.  It is land-users who not only ultimately decide how to use land and whether to search, but are the ones actually performing the production and the searching.  The question is whether the taxation of ground rents remove the incentive from the land-user to utilise a location and seek further opportunities within it.

Go to Part 3

Obi-Wan Kenobi: Anakin, Chancellor Palpatine is evil!
Anakin Skywalker: From my point of view, the Jedi are evil.
Obi-Wan Kenobi: Well, then you are lost!

Star Wars: Episode 3 – Revenge of the Sith

A commenter has asked that I take a peek at this working paper from Caplan and Gochenour.  It doesn’t really read like an academic treatise, but that’s something for another day (I intend to do this in 5 parts).  Today, I want to lay a brief groundwork regarding the authors’ assumptions.

Paradigms are powerful things.  They enable us to organise, systematise and internalise the outside world.  Whatever we observe, we do so through a paradigm.  Without a paradigm, we would literally make no sense of our senses.  This power of a foundational framework comes at a cost, however.  Paradigms also act as filters that accentuate or attenuate the importance we place on particular phenomena.  More importantly, however, they contain the axioms on which we base our reasoning; they form the very logic by which we examine things.  If a paradigm contains an incorrect axiom, it is impossible to detect by logical reasoning.  At some point, all arguments become essentially circular, because all arguments are based on axioms.

Turning our attention to the topic at hand, a term that appears many times throughout the paper is ‘distortion’, or variants on the theme.  The problem with using terms that denote deviancy from a norm, is that the employment of such terms establish a tacit definition of that norm, and that definition is rarely even acknowledged, let alone examined.  Yet to have any hope of reaching a meaningful conclusion to the topic, it is necessary to know the assumptions on which that conclusion is based, and on what basis they are considered valid.  Such is not the case in this paper.  Here, the assumptions are left unacknowledged, rendering much of it gibberish to one who rejects the premises.

The assumed norm we find here is the Propertarian position of private property in land, manifested in a couple of specific ways that LVT is determined to change behaviour from an ideal (we’ll look at these in detail later), and thus is regarded as a distortion.  If this assumption is accepted uncritically by the reader, then the paper seems quite robust.  Look at the base, though, and the edifice reveals itself to be extremely precarious.

Go to Part 2

Newbury Investments (UK) Ltd is a financially strong group which will underpin Norbain and allow Norbain’s suppliers, customers and employees to be confident in its future trading.

Norbain Press Release, emphasis mine

Debts that can’t be paid, won’t be.

Michael Hudson

I’d promised someone a post on something else (although, I don’t think he’s actually that interested), but my attention was almost immediately diverted by the news of Norbain being bought out under distress.  This is big, big news at work, as Norbain are our biggest distributor, they owe us a lot of money, and we had no idea this was happening.  Norbain are claiming that following their pre-pack administration, which was entered and completed in a day, all the money they owe us is…well….not owed to us anymore.

What’s particularly galling about this is this press release (I’m assuming it came from KPMG), which suggests that although the formal process only took a day, this had been 13 weeks in the planning.  13 weeks where they happily continued placing orders that, even though we have fulfilled them, they appear to have had no intention of paying for.

Not to mention the suggestion that KPMG have saved jobs.  I can’t imagine that there won’t be suppliers going under following this (although as things stand we’ll survive) and bear in mind that Norbain are just a middleman.  It’s not like our business models are predicated on Norbain’s existence.

The icing on the cake was that yesterday, after this all came out, one of the admin team got a call from Norbain.  Apparently, we made a mistake last week, charging them shipping when we shouldn’t have done.  They wanted their £15 back!

Anyway, this all got me thinking, and reminded me of the Rangers debacle and other such recent shenanagins.  I’d love to know what other creditors Norbain have (other than suppliers I mean), whether they were involved in this process at all (I’m thinking bank maybe?) and what they got out of it.  The wiki article I linked earlier mentioned an acedemic criticism of pre-packs: that they favour the secured creditors.

It’s, for me, another example of the strangeness of debt-financing of a company as opposed to equity-financing.  A shareholder is the last person to get any money in a bankruptcy, but a bank lender is (as I understand it) one of the first in line although their position and relationship to the company is not far removed from that of a shareholder.  Makes less and less sense everyday.

Update 5/7/12: Came across this commentary that confirms my understanding that banks are high up (actually top) in the food chain in a bankruptcy.  Seems to be because of the ‘secured’ nature of the lending.  In my experience, secured lending means land-debt.  Once again, rent-seeking comes first.  And people wonder why the economy’s broken.