Land: The Conceptual Problem with Strictly Finite Resources
The consideration of land, as a factor of production existing in strictly finite quantities relative to the possible expansion of demand for its products, constitutes a clear problem in the development of modern economic theory, encompassing the English and French pre-Classicals, the Classical economists, and the Neoclassical tradition. Certain pre-Classicals, like the French Physiocratic school, were noteworthy for elevating land to a foundational role in the creation of wealth. Conversely, by the early Nineteenth century, David Ricardo had labeled the ownership of land, imposition and extraction of differential rent, and inherent restraints on agricultural productivity at the margins of fertility the critical constraints on industrial capitalist development. By the closing decades of the Nineteenth century, Léon Walras was reiterating, to a significant extent, the arguments of the American reformer Henry George, calling for the confiscation of land rents by the state, either by means of a single tax on landed property (George) or outright nationalization of land holdings (Walras). In view of Walras' central place as a key inspiration for the sort of general equilibrium economics that we have elaborated here and the unmistakably radical overtones in his approach to land ownership, it stands to reason that we need to stop and interrogate the extent to which land is different from labor or capital.
In certain ways each of the factors of production is a catch-all, consolidating divergent ranges of heterogeneous substances into homogenized categories for the purposes of deriving compensatory rates that bear some reflection to physical productivity at the margin of employment. The previous two sections have provided ample evidence for why abstract homogenization of the production factors, however theoretically possible, may not yield any practical relationship to compensatory rates. Rather, if we can get to product exhaustion by means of output price imputation of factor prices through linear optimization, then we can afford to downplay the necessity of having abstractly homogeneous production factors - vectors of heterogeneous factors will work fine to construct a more nuanced portrait of production and the distribution of incomes by firms. Like labor and capital, land can be approached in this heterogeneous manner, recognizing the unique productive characteristics of different forms of land.
Acknowledging that each of the production factors can be treated in a way that respects the heterogeneity of individual forms, the problems with land emerge most clearly when we posit the characteristics that make each of the production factors unique as a consolidated category. Labor subsumes all manifestations of basic human exertion, physical or mental, distinct from the accumulation of learning/training and/or experiential improvements on productivity. Capital, whether mechanical or human, subsumes all sources of productivity enhancing roundaboutness in production processes. As unifying wholes, both of these categories work and, in their own ways, each advances arguments in economic theory for why their respective contributions to the production process should command a rate of compensation for their household owners. As such, the owners of labor and capital exert ethical claims to compensation based, respectively, on the inconvenience/disutility of human exertion and the disutility of deferring consumption until some point in the future in the expectation of increased consumption possibilities.
Land, in this respect, has traditionally been considered differently. The owners of land might invest resources into the enhanced value productivity of their factor of production, but to the extent that they do so, their land becomes intermingled with capital. By definition, in multiple distinct approaches to economic theory, both Classical and Neoclassical, land encompasses factors of production with innate productive qualities, incapable of being augmented without transforming the character of an asset. In this sense, land shares a basic, natural quality with labor - any addition to the productive power of labor transforms it into a composite of labor and (human) capital. But land differs still more in its relation to labor. If to some degree, labor and land can both be expended progressively through successive iterations of production processes, natural processes exist for the reproduction of labor (both in relation to its static productivity and in relation to human life, per se!). Land lacks such reproductive processes. As such, land is distinguishable among all of the factors of production as a factor that cannot be reproduced - land, by definition, is absolutely scarce. Any effort to produce land or to replicate its unique productive qualities constitutes not land but capital. Reclamations of land/natural resources demand investments of capital to generate usable assets. Such investments transform a natural asset/land into produced capital, arising from the deferred consumption of an investor rather than the bequest of a common natural endowment.
Before moving forward, I want to develop this distinction between land/natural resources and capital at a margin where the two factors quite readily become blurred by inescapable complementarities - that is, we need to situate land and capital as factors of production in agriculture. It is one thing to talk about the uniquely fertile capacity of sediment-rich soils in an alluvial flood plain, like that of the Connecticut Valley in Western Massachusetts once occupied by glacial Lake Hitchcock, or the natural reproductive cycles of bovines prior to domestication of dairy and beef cattle. Such resources and processes are parts of a common natural endowment from which agriculture has derived raw materials for the development of an industry providing elements of sustenance to human society. It is another thing to talk about the accumulation of knowledge on diverse biochemical compositions of soil, the use of nitrogen enhancing fertilizers to augment the naturally occurring fertility of the soil, research into regulation of reproductive cycles of dairy cattle, and use of particular antibiotic medications to reduce harmful micro-organisms and enhance muscle growth in beef cattle, swine, or poultry. By any definition, the latter processes and bodies of knowledge incorporate the work of human beings to, directly or indirectly, expand the productive capacity of naturally occurring processes by investing capital.
This distinction immediately raises questions about how we interpret the existence of domesticated work animals or newly developed varieties of fruits, vegetables, and grains, arising either from cross-breeding or genetic manipulation at a cellular level. In some measure, the domestication of Holstein dairy cattle reflects a longer process of capital investment in the breeding of more efficient milk-producing bovines. Likewise, the evolution of durum wheat (triticum durum), from other domesticated and/or wild diploid and tetraploid grasses in Mesopotamia sometime around 7000 BCE, resulted from intentional or inadvertent cross-breeding of diverse species by human cultivators and/or harvesters of wild grass seeds. If, in this regard, durum wheat manifests certain regular patterns of reproduction/fertility in relation to particular varieties of soil (e.g. nutrient poor sandy soils), in particular climatological (e.g. frequent drought) conditions, and susceptibility to particular micro-organisms, it is possible that in many circumstances such natural characteristics were at least initially lost on the first cultivators of the crop. Again, to the extent that capital represents a continuum in the development of production process, where the rudimentary becomes steadily more roundabout if only by virtue of the accumulation of knowledge, the project of differentiating between naturally occurring objects and products of capital accumulation in agriculture might be somewhat ill-founded. The world in which we live truly exists as second nature, in which we, as a species, continually reshape and reinvent the natural endowment from which we draw and to which we return. Notwithstanding the obvious difficulties involved in sorting out land/natural resources from capital in agriculture, we might at least concede, as a pragmatic gesture, that recent (e.g. within 200 years?) or contemporaneous efforts to augment or otherwise transform natural endowments in agriculture constitute capital rather than land.
The idea that land, as such, arises from a common natural endowment (that is, the "commons") is central in constituting the critique of rent as the compensatory return to land ownership in economic theory, writ large. If wages constitute a compensatory return to the contribution of basic human exertion and interest constitutes a compensatory return to deferred consumption/savings, rent, by contrast, compensates the mere ownership of a productive asset isolated from the commons by private ownership. As we will see in our considerations of Walrasian/Paretian welfare economics, there may be salutary consequences to the privatization of land holdings with respect to the maintenance of natural endowments over time and prevention of spoilage/overuse (i.e. the "tragedy of the commons"), but land is, again, unique among production factors for commanding a rate of return from mere ownership. In effect, land rent, and rental payments, per se, (of which wages and interest are special cases where the use of an asset features a palpable inconvenience/disutility for its owner) constitute returns to the owner of an asset in return for transitory use rights by an entrepreneur or, in our Walrasian/Paretian case, by a firm minus an entrepreneur. If rental payments conferred on the owners of land holdings/natural resources compensate the mere isolation of an asset from the commons and the monopolization of its use rights, then we not only lack a basis for compensation of land in the inconveniences incurred by owners for its supply to a production process, but we have an asset in which the determination of a compensatory rate emanates both from absolute scarcity and the capacity of an owner to exclude competition over use rights vis-à-vis entrepreneurs/firms.
Summarizing the problem of land and its consequences in relation to our Walrasian/Paretian theory of the firm, certain natural resources, otherwise available for free use by entrepreneurs/firms, are extracted from the commons by certain households, who exert an ownership claim on the assets. The nature of such claims resides outside of the structure of Walrasian/Paretian theory, wherein land, as a factor of production, is largely ignored for precisely the reason that ownership claims on land are not justified in accordance with the same ethical principles as claims concerning ownership of labor and capital - the production of land is not attributable to its owners and, thus, it would be impossible to deduce an appropriate rate to compensate land owners for the inconvenience of producing their assets.
Land ownership is an institutional problem, related to the broader development of property rights in diverse cultural contexts. In Western Europe, such institutions go back to the gradual and uneven breakdown of feudal institutions in rural/agrarian geographies, where local manorial lords, increasingly divested of rights to consume goods and services generated by local agrarian producers, parceled out their manorial lands into lease holdings at rents commensurate with the value productivity of the land for production of marketable goods and services. This process, accompanied by the sometimes forcible expulsion of small, subsistence-level agrarian producers (freeholders) in the name of pursuing market-driven consolidations of land (in Britain, the "Enclosure" movement), constitutes the beginnings of commercial agriculture in Western Europe. The broader question of how such a movement of institutional transformation could have occurred, however, demands an explanation incorporating a wide range of cultural processes, including the reconfiguration of theological principles governing commercial/entrepreneurial ethics and the reorganization/centralization of political power between local feudal lords and overarching monarchical authorities. However the transformation from generally communal land holding to the creation of private property in land actually occurred and for whatever reason, it fundamentally resulted in the creation of durable institutional claims to a share of commercial agricultural and/or extractive incomes as a condition of mere ownership of land, the very claims that so bothered Ricardo, George, and Walras!
Beyond the development of commercial agriculture and other productive sectors generating or otherwise utilizing natural resources intensively, private land ownership commands incomes as a function of the spatial distribution of economic activities. That is to say, to the extent that the location of economic activity in relation to sites of market exchange is an important consideration for entrepreneurs/firms, especially with regard to the minimization of transportation costs, the distribution of land ownership and use rights to land in close proximity to relevant sites of economic activity becomes an important issue. Having briefly considered this problem in relation to the spaceless character of our Walrasian/Paretian theory of the firm, it bears repeating that differential land rent may serve a useful economic purpose of regulating the dispersal of economic activities across space. On the other hand, from a Georgist perspective, the same ends could be achieved through differential taxation of land holdings relative to their advantageous or disadvantageous locations. In either case, to the extent that differential extractions of income from other activities are expressly related to spatial relations distinct from the mere ownership of land, the title of ownership solely functions to designate the recipient of incomes generated from the competitive distribution of economic space in accordance with the willingness of entrepreneurs/firms to pay for relatively advantageous locations.
So far, we have discussed the concept of marginal productivity factor pricing with regard to labor and capital, noting that obstacles to homogenization of these factors might compel us to dispense with marginal productivity pricing in favor of imputation from output market prices. With regard to compensatory payments for land ownership, recourse to imputed prices may not even provide us with a satisfactory explanation. Again, the overriding problem here resides in the nature of land as an absolutely scarce, monopolized factor. On the other hand, the particular circumstances of production processes may at least partly undermine the capacity of land owners to extract rent from firms. Precisely, the nature of competition between land owners and the substitutability of divergent natural resources, on the one hand, and competition between firms, on the other hand, is at stake.
The point that Walrasian/Paretian theory and most other Classical and Neoclassical approaches have made about the determination of rent has centered on the residual character of rent. That is to say, ownership of land/absolutely scarce natural resources commands all excess income over and above compensatory payments to the owners of labor and capital, a definition which appears to negate any basis for the determination of rent as a return to the productivity of natural resources at the margin of employment. Insofar as we accept this argument, any excess over incomes designated to pay wages and interest on capital that we might otherwise designate as profit would immediately be paid out to compensate land owners. Such a formula for the compensation of land would not only enforce a zero-profit condition on the firm by the peculiar mechanism of conferring on one production factor all residual income beyond factor payments strictly determined by the marginal productivity, but, to the extent that excess income over factor payments is transitory or otherwise quantitatively indeterminate, we would be unable to calculate any ex ante distribution for the productivity of natural resources in some way related to the mathematical formula of a production function. If a firm's income was wholly exhausted in compensatory distributions to the owners of labor and capital, then the owners of land would receive nothing, no matter how productive their assets were to a production process. On the contrary, the particular concerns voiced separately by Ricardo and George, that the unproductive monopoly power of land owners, exercised to extract incomes from the productive owners of labor and capital, would tend to depress both wages and profits/interest, imply that some alternative methodology, strictly related to market forces, must establish the upper and lower bounds for compensatory payments to land owning.
Emphatically, the character of rent as a residual remains, especially for Walrasian/Paretian theory, if only because the ethical predispositions underlying Walrasian production analysis preclude the possibility of including mere ownership of a natural resource as a service in the arguments of a production function. However, this character must be mitigated by the capacity of firms to substitute between multiple owners of land/natural resources. As such, the owners of land bearing extractive resources (e.g. crude oil) might enjoy a monopoly on access to an absolutely scarce resource, but their capacity to extract rents is mitigated by the capacity of firms to select between land owners supplying access to the same or comparable resources. In the end, the relative scarcity of natural resources in each particular market context is more relevant to the determination of compensatory payments to the owners of land than the absolute scarcity of the resources. The capacity of firms to draw on a large number of alternative suppliers of natural resources must undermine the aggregate effect of absolute scarcity, in exactly the same way that firms engaging with much wider labor and capital markets will suffer less from relative scarcity of these production factors. In the near term, the fact that a particular natural resource cannot be reproduced need not constitute a hard constraint on compensation to the other factors.
Again, with respect to land, firms must face a vector of discrete heterogeneous factors, with varying degrees of complementarity and substitutability considered in relation to other discrete factors. That is to say, the production of particular goods, like abrasive sands utilized in a range of downstream industrial operations, may demand access to a range of discrete extractive sites/mines. The rate of return to the household owners of such sites constitutes land rent. Variations in the quality of materials derived from certain mines will generate variations in rental rates. Further, the location of mines in relation to downstream production sites may additionally impact rental rates if transportation costs vary substantially, especially due to variations in accessible transportation infrastructures. The more remote a mine is, the less its household owners may be capable of extracting rent from firms seeking to utilize its materials. Under all such circumstances, the return to land owning households remains, at least in part, a pure return to land ownership. Conversely, household investment in infrastructures to improve the capacity of firms to extract materials demands an additional return in the form of interest on capital. The inclusion of such improvements for natural resources must technically constitute a combination of discrete land and capital factors demonstrating high levels of complementarity in the firm's production function.
Acknowledging, in these respects, that firms confront heterogeneous forms of land, we cannot simultaneously dismiss the idea of abstractly homogenizing land in order to define a quantitative registry of inputs commanding rates of return on the basis of marginal productivity. Again, as with labor and capital, the point behind homogenization is to relate the compensation rates for a given factor to the physical and/or value productivity of the factor at the margin of employment. Expanding our two-factor analysis, we should be able to determine profit maximizing/cost minimizing combinations of labor, capital, and land under the assumption that we have a production function consistent with Walrasian/Paretian assumptions about continuous factor substitutability at discrete scale of output and constant returns to scale. We would simply be adding an additional dimension to our analysis. The problem here is less mathematical than it is ethical/rhetorical. Simply stated, Walrasian theory proper has a lineage in seeing the landowner as, for all intents and purposes, an unproductive social parasite, profiting at the expense of productive workers and productive capital investors on the basis of mere ownership of absolutely scarce assets.
The Walrasian prejudice against land ownership, reflected, again, in Walras' support for the complete nationalization of land, as a reassertion of the natural collective ownership of land, through the state, may further explain why land is often excluded as a factor of production in general equilibrium theorizations. Why complicate analyses unnecessarily with a factor for which compensatory payments have historically been regarded as illegitimate? As such, we again encounter the basic consideration that all theories are partial and partisan in their efforts to reshape the reality that they analyze. The truths that a Walrasian/Paretian theory of the firm might advance with regard to land ownership must reflect, in certain respects, partisan prejudices against the extraction of rents in exchange for access to absolutely scarce assets. In turn, they conform to a larger theoretic ideal about industry and competition. If all of the factors could be readily reproduced, even or especially at the inconvenience of their household owners, then the compensatory rates charged for use of the factors should, in some way, reflect the inconvenience incurred by households in producing the factors in form usable by firms, mitigated in turn by competition between household suppliers of substitute factors. With land, one of these two dimensions on the supply side is missing - there may be competition between suppliers but land owning households never incur an inconvenience in supplying their factors because they are not produced and cannot be reproduced. The inclusion of an absolutely scarce factor of production within the larger structure of a general equilibrium economy would, thus, on the whole, enshrine monopoly claims to a share of aggregate incomes not otherwise backed by any productive activity. For Walrasian/Paretian theory, such an outcome is anathema to the operation of a free market economy in which the productive self-interested behavior of households maximizes social well being.
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