Land Rather than Capital the Long-Run Oppressor of the Workers…

Ryan Avent and Karl Smith are having a debate about Thomas Piketty’s Capital in the Twenty-First Century, and both are, I must say, getting rather (Henry) Georgist about it:

Ryan Avent: Inequality: Capital and land: “FOR a book that hasn’t even been published in English yet, Thomas Piketty’s Capital in the Twenty-first Century has prompted quite a lot of discussion….

I think it’s worth addressing some points made in a recent Alphaville post by Karl Smith. Mr Smith… writes:

Importantly, however, the resurgence in [the importance of] capital is driven almost exclusively by a rise in housing values, and those values stem almost entirely from what classical economists would have termed land… the value of land… the value of… structures… [and] in the modern world… the option value induced by zoning and land use restrictions. Paris is the perfect example of the powerful effects of such land use restrictions. The demand for housing in Paris is extremely high…. If you wish to be doing business at a certain level in France then you must live in or around Paris… [or if you] wish to experience the legendary culture and beauty of the city and to live in proximity with others who value it. Paris maintains the latter demand in large part by severe restrictions on the height and architecture of buildings… preserve the history of Paris, but also make it impossible for it to house all of the millions who would come today to live and work….

This increase in rents and housing prices is the option value of Paris’s land use restrictions… [and] properly accounted for as a land value, not a capital value…. Irreproducibility and inheritance are the essential features of land in classical economics. Thus, the story here isn’t so much about capital, but about land in the 21st century….

I don’t really think Mr Smith has done the book justice…. First, the French data he considers is a bit of an outlier…. In Britain the recent rise in the capital-income ratio is about two-thirds attributable to housing and one-third attributable to other domestic capital. In America growth in other domestic capital is actually more important than growth in housing.

Second, Mr Piketty’s book isn’t really taking a production-function approach. Rather, he’s interested in exploring the dynamics of changes in growth, wealth, and income… which would be an outrageous thing to do for some sorts of economic analysis but is not, I think, for his purposes. Whatever its causes, a surge in the ratio of wealth to income in the economy can be both highly persistent and pernicious….

Third… Piketty is sympathetic to David Ricardo’s view of the importance of the scarce factor in production: gains from growth will tend to be captured by that which is most scarce in the economy….As Mr Piketty says:

[T]he “scarcity principle” on which [Ricardo] relied meant that certain prices might rise to very high levels over many decades. This could well be enough to destabilize entire societies. The price system plays a key role in coordinating the activities of millions of individuals…The problem is that the price system knows neither limits nor morality.

In other words… what is important is the rise in asset prices, the resulting growth in wealth, and the consequences of wealth concentration for political and social stability…. So I would say that changes in housing wealth are one piece of the story that Mr Piketty is telling.

And Karl Smith: Not All Forms of Wealth Are Equally Pernicious: “Ryan Avent takes issue….

When the value of capital rises above its replacement rate folks start to produce more of it…. As the quantity of capital increases, the return to capital is driven down. Eventually, the return to capital falls below the growth rate of the economy, and the value of the capital stock starts to shrink…. This automatic correction mechanism is not an anomaly but a fundamental feature of capital. Because capital is reproducible, high valuations invite competitors. Competitors soak up the oxygen and drive the valuations back down. Land does not have this correction mechanism and, as Piketty shows, land in the Ancien Regime of France was twice as valuable–relative to the economy–as capital ever has been….

I am a fan of Piketty’s brute mechanistic approach. It is one that I have employed myself and on much the same question. It is one that led me to conjecture, and still suspect, that landlords are the once and future global plutocracy. And this happens precisely because all wealth is not created equal and some forms are more persistent and pernicious than others…. Lehman Brothers is dead. Sam Zell, founder and CEO of Equity Residential, is still alive. This is not an accident. The future does not belong to high flying titans. It belongs to dogged men and women who squirrel away rent checks when times are good, and buy your home when times are tight. This is the tyranny of land. Ignore it at your peril.