4. Social Decline
And the great owners, who must lose their land in an upheaval, the great owners with access to history, with eyes
to read history and to know the great fact: when property
accumulates in too few hands it is taken away. And that
companion fact: when a majority of the people are hungry
and cold they will take by force what they need.
—John Steinbeck, The Grapes of Wrath
While our current form of capitalism has undoubtedly created an abundance of material wealth, it’s also responsible for many of the social problems we have today. We may wonder how the ability to profit from land fosters social dysfunction, but once we realize the extent to which wealth exists in abundance and the extent to which community wealth is privatized for personal gain, we also come to realize just how corrupt most societies actually are. Many social problems exist as a result of how our system misallocates wealth, not as a result of an unalterable human condition.
In order to examine the causes of many of our social problems, it’s imperative to look at how land values are privatized through our current model of property ownership. Land is prized in our society: Large sums of money change hands in real-estate transactions every day. The value of land changes over time—sometimes it goes up, and sometimes it goes down—although history has shown that as society becomes more prosperous, the value of land tends to rise ahead of inflation.
Communities, not property owners, make land valuable. “But wait,” you might say, “if I build a house on a piece of land, I can sell it for more money afterward. The value of a property surely depends on what I do with it.” Indeed, the value of a property changes: A property with a house on it is more valuable than a similarly sized property nearby that doesn’t have a house. However, as long as the wealth of the surrounding community remains unchanged, improvements don’t affect the value of the raw land upon which they exist in any significant way.
It’s important to distinguish the value of raw land from the value of improvements made to land. Whenever we make that essential distinction, we differentiate something that exists by itself in nature—land—from something that has been created by human beings: improvements to land, such as buildings. To help us better understand that the value of land is social in nature, let’s imagine a barren plot of land in a desert so far removed from civilization that it can’t be of use to any human being. That barren plot of land could be claimed for free since no human being would ever conceive of using it for any purpose; its sales price would therefore be $0. Even if hundreds of millions of dollars were poured into the construction of a skyscraper on top of that plot of land, the skyscraper wouldn’t be useful to anyone. As long as the building stood alone with no surrounding properties or population—no community benefits or conveniences of any kind—no one would conceive of buying the property for any amount over the value of its material improvements. This is why—and this insight is crucial—land values belong to the communities that have created them: Land values are socially generated.
The irony is that while improvements such as buildings don’t affect the underlying value of the land upon which they are located, they do have the ability to indirectly affect the properties that surround them. They do this by coalescing already-existing demand in one location into surrounding land-value increases, much like a cool pane of glass coalesces invisible water vapor into droplets. A hospital building, for example, provides a setting for doctors and nurses to practice in an area, and this increases the quality of life for the people who live in that area, which in turn creates more demand for that particular location. Buildings and other infrastructure, therefore, can indirectly cause land values in the surrounding areas to increase.
Thus far we have discovered three truths about real estate:
- The value of a property can be divided into the value of its improvements (capital) and the value of the underlying area (land)
- Improvements made to a property increase the total value of the property, but generally don’t change the value of the underlying land. Instead, land values are socially generated and belong to the communities that have created them
- Buildings can indirectly make surrounding land more valuable
If we purchase a property with a house for $250,000 and determine at the time of purchase that the building itself is worth $100,000, we know that the sales price of the land itself—the raw land, if no improvements had been made to it—is worth $150,000. If we sell the property a year later for $270,000 without making any additional improvements to it, assuming our building has not deteriorated and that there hasn’t been any monetary inflation, our 8 percent profit of $20,000 is entirely due to the heightened demand for the underlying location. Demand might have increased because of the presence of an additional population or because of the presence of more valuable services or infrastructure in the surrounding area. This profit doesn’t arise from any additional value we may have created for society.
In this example, our 8 percent profit of $20,000 exclusively results from a 13 percent increase in the price of this particular land in this particular location, now priced at $170,000 instead of $150,000. The sales price has simply risen because the community around it became wealthier as a whole. Therefore, when we pocket the profits from this sale, we’re being financially rewarded for wealth we didn’t create; moreover, we receive this reward at the expense of everyone else, since the cost of living and working has become significantly higher for everyone living in the vicinity. Since the value of land is determined by its surroundings, we as a society have for centuries allowed property owners to privately reap vast amounts of socially generated wealth! This profiting is in actuality an ongoing theft from society, and it leads to greater and greater wealth inequality at the expense of those who don’t profit from land.
Since people can only be paid for their goods and services or extract rent from society, less income is available to service the payment of goods and services when proportionally more income is used to pay monopolized rent for land. Essentially, whenever property owners collect rent from rising land values, fewer financial resources are left over for wages and capital investments, and this dynamic can effectively put society on the fast track toward social decline and wealth inequality. As society becomes increasingly wealthy with progressive development, property owners absorb a greater and greater share of society’s wealth, leaving less to pay for goods and services. This principle helps explain why wages tend toward a minimum in a materially abundant society: Why do fast-food employees have to hold down two jobs at minimum wage while their employers—the chains themselves, not the franchisees—rake in millions of dollars through their real-estate investment trusts? Why are property developers, who make money by renting out homes in valuable locations, able to command high returns year after year while middle-class homeowners and wage earners have to struggle to pay off their mortgages?
Because we do not differentiate land from capital, private gains from land-value increases are generally counted as capital gains, which is why there’s only indirect evidence that correlates wealth inequality to incomes from land. As long as more and more people compete for land in certain locations, and as long as individuals and companies are permitted to reap profits from resulting increases in underlying land values, the forces that perpetuate wealth inequality grow stronger. Given our current system of property ownership, it makes sense that we would see greater wealth inequality in places where there’s greater population density because land values command a greater percentage of the financial resources in the denser areas and only flow into the hands of those who own land. Wages, meanwhile, don’t increase proportionally across the board as land becomes more expensive.
As Marcus Aurelius, the great Roman philosopher-king, wrote nearly two thousand years ago, “Poverty is the mother of crime.” Whenever a society is increasingly pushed toward greater and greater wealth inequality, everyone is negatively affected. According to one finding published in The Review of Economics and Statistics, violent crime in society has a strong correlation to wealth inequality, whereas property crime—not violent crime—has a strong correlation to poverty and police activity. In other words, while poverty may compel people to steal or damage property, wealth inequality is more likely to compel people to lash out with violence. The psychology behind this pattern isn’t difficult to understand: While people may have a tendency to steal out of desperation, they’re more likely to commit violence out of anger and frustration if they’re faced with high levels of inequality, which evoke a sense of injustice, at least on a subconscious level. These findings are important because they show us that as long as considerable wealth inequality exists—and by implication our ability to profit from land—violent crime is likely to remain a constant part of our human experience.
The ability of individuals to extract wealth from society by profiting from land also leads to cultural degeneration and a loss of social cohesion over time. As people converge around a certain location—be it a growing town, city, or metropolis—the demand for land increases. The price of land is bound to increase as a result. In general, as the value of land increases, the return on capital tends to decrease comparatively, which discourages business owners from investing in capital goods and private enterprise. Shrewd investors care about their return on investments, and if land provides a better return on investment than capital, resources will flow away from endeavors that can create jobs, produce wealth, and enliven society, and instead flow into land speculation. As people increasingly extract wealth from society, society will fail to properly harness the regenerative powers of culture and wealth-producing enterprise, and instead incentivize speculative behavior that leads to the corrosion of the social fabric. This cycle eventually brings about the decline of society itself.
“There are a thousand hacking at the branches of evil to one who is striking at the root,” Henry David Thoreau famously remarked. Conventional approaches that seek to remedy many of our social problems are often only hacking away at the “branches of evil.” Every time we address a social issue by making a place more livable, such as through charitable acts or increasing the availability of social services, society’s wealth invariably increases; as a result, those who are able to profit from land eventually stand to remove more wealth from society at the expense of those who are not. And this is why even social and technological progress on its own cannot solve the issues that beset human civilization as long as some can profit from land at the expense of others. Issues such as social decline and crime have to be remedied at their core; if we wish to strike at the root of these issues, we have to share with one another the value of land, and doing so will lead to a better quality of life for everyone. Walt Whitman, one of America’s greatest poets, expressed it beautifully:
The greatest country, the richest country, is not that which has the most capitalists, monopolists, immense grabbings, vast fortunes, with its sad, sad foil of extreme, degrading, damning poverty, but the land in which there are the most homesteads, freeholds—where wealth does not show such contrasts high and low, where all men have enough—a modest living—and no man is made possessor beyond the sane and beautiful necessities of the simple body and the simple soul.
Walt Whitman, as photographed by Mathew Brady
- In some cases, improvements that have a significant impact on
their environment—Disneyland, major airports, etc.—can indirectly influence the value of the land upon which they exist by
influencing the desirability of the surrounding land, but those are
the exception rather than the rule.
- This statement can be expressed concisely with the following
1) Wealth produced by labor and capital using nature’s gifts =
total wealth produced.
2) Total wealth produced minus wealth extracted from society
(rent) = wealth left over to pay for goods and services.
- As we can see in the figure below, growth in land values (indicated by the top graph, which shows growth of residential land
values in the United States) tends to outpace growth in wages
and capital returns (approximated by the remaining graphs, which
show growth of household incomes for the lowest through highest fifth of households in the United States by income). Higher-earning households are presumably more likely to profit from
land, because they’re more likely to own property.
ILLUSTRATION 4-1: LAND VALUES VERSUS WAGES
Land Value data: Morris A. Davis and Jonathan Heathcote,
“The Price and Quantity of Residential Land in the United States,”
Journal of Monetary Economics 54, no. 8 (2007): 2595–620.
Household Income data: U.S. Census Bureau, 2010.
- John F. Love, “Big Macs, Fries, and Real Estate.” Financial Executive, 4 (April 1987), 20–26. The success of McDonald’s, for
example, can largely be attributed to its real-estate policy.
- According to a study of tax filings in the United States from
1991 to 2006, incomes from dividends and capital gains—which
contain land-value gains—were the greatest contributors to the
wealth divide in the United States during that time:
ILLUSTRATION 4-2: CHANGES IN INCOME INEQUALITY
AMONG U.S. TAX FILERS BETWEEN 1991 AND 2006:
THE ROLE OF WAGES, CAPITAL INCOME, AND TAXES
Thomas Hungerford, “Changes in Income Inequality Among
U.S. Tax Filers between 1991 and 2006: The Role of Wages,
Capital Income, and Taxes” (working paper, January 23, 2013).
- By allowing property owners to profit from land, we systematically reward them with financial resources that never were, in
truth, theirs to begin with. The entire boom in housing prices in the
early 2000s was essentially a grand theft as housing prices increased
without corresponding increases in real wealth. Even today, with an ongoing slump in housing prices in many parts of the world, we
see savvy real-estate investors buying up inexpensive properties because they know that, in time, property prices will rise again, giving
them the renewed ability to profit from future land-value gains.
- Using 2010 data provided by the U.S. Census of the Gini coefficient
of wealth inequality for each U.S. state and Washington D.C., we
see that, indeed, we have greater wealth inequality in places with a
higher population density. The Gini coefficient is a mathematical indicator, used in this case to highlight disparities in the distribution
of wealth. A Gini coefficient of 0 indicates perfect wealth equality,
where every family or household has the same income (meaning
wealth is most evenly distributed throughout society), while a
Gini coefficient of 1.0 indicates a situation where one family or
household has all the income (meaning wealth is most unequally
distributed throughout society). A Gini coefficient anywhere from
0.419 (for the state of Utah) to 0.532 (for Washington, D.C.) is a
comparatively high coefficient for any developed nation.
ILLUSTRATION 4-3: POPULATION DENSITY BY GINI COEFFICIENT FOR EACH U.S. STATE AND D.C.
Population: U.S. Census Bureau, “Annual Estimates of the
Population for the United States, Regions, States, and Puerto
Rico: April 1, 2010 to July 1, 2011.”
Area: U.S. Census Bureau, “Land and Water Area of States and
Other Entities: 2008,” 2012.
Gini coefficient: U.S. Census Bureau, “Household Income for
States: 2009 and 2010,” 2011.
- In places and cultures where private parties aren’t able to profit
as much from land at the expense of other people, wealth in-
equality has a lower correlation to population density. Taiwan,
for example, is a small yet financially prosperous island with a
fairly large population; it underwent substantial land reforms in
the 1940s (K. S. Jomo, “Globalisation, Liberalisation, Poverty
and Income Inequality in Southeast Asia,” OECD Development
Centre, 2001). In 2009, Taiwan’s population density of 1,658
people per square mile was greater than that of any U.S. state, and
yet its Gini coefficient was only 0.35 (Daniel He-chiun. Liou,
“Poverty and Social Exclusion Measurement in Taiwan,” 2011).
Taiwan’s Gini coefficient was even lower in the 1980s, before the
government changed its land policies to allow more land values to
be claimed by private land speculators.
- Morgan Kelly, “Inequality and Crime,” The Review of Economics
and Statistics 82, no. 4 (November 2000): 530–39.