The Economic Rent Collected in Advance
As explained in the basic principles of part1 the economic rent of land arises inexorably and is collected by whoever is in control of the land, whether an individual or a government. One interpretation of Ricardo’s law of rent states:
‘The rent of land is determined by the excess of its product over that which the same application can secure from the least productive land in use’ (1).
In Ricardo’s time theories were based on an agrarian economy where fertility was the principal factor in determining productivity and the corresponding land value. In later years, with the urban growth of cities, productivity became more related to location within an agglomeration, but the principle of the economic rent still applied.
Whether in an agrarian or an urban situation there is always a difference in productivity of any site in relation to the marginal or least productive site for the same amount of input. This difference or surplus determines the amount any landlord can extract from the tenant for the use of the site. This extractable ‘rent’ may be seen as the surplus that remains when all other costs of production have been met. What is seldom realised is that this surplus may be anticipated and collected in advance in the form of increased land values.
In the early days in Britain, entitlement to the surplus was decided either by force of arms or the general acceptance that the monarch held total control and was therefore entitled through ownership to any surplus wealth. The monarch was later obliged to share this entitlement with a growing nobility who exercised control over their own domains and collected the economic surplus from the peasants, farmers, artisans and traders, who were the real wealth creators. This heralded the beginning of the Rentier system that still operates today. With this system the surplus was collected in arrears; that is after the wealth had been created; the landowners would simply take a proportion of whatever was produced for their own use and pass on an agreed amount to the Monarch. This represented the collection of the economic surplus, the economic rent, within an agrarian economy.
The collection of the economic rent in advance began with land speculation during the Enclosures, but especially during the Industrial Revolution, in the transformation from a rural to an urban economy. As villages and towns grew into cities urban land became ever more valuable and the corresponding rents obtainable through ownership of such land became more evident. The acquisition of tracts of land in anticipation of this growth gave rise to widespread speculation. The new owner may have developed the land in his own interest, but in many cases the land was simply held out of use until surrounding values rose, then sold off in small parcels at a profit. This is how the economic rent was collected in advance. No investment was made, no work was done on the land in question; the speculator simply waited whilst his wealth increased from the activity of the surrounding community, and then collected his gain when the time suited him, before any economic activity towards wealth creation on the land had even begun. The collection of the economic rent in advance is a very lucrative and risk free means of gaining wealth. Two contemporary examples of this are worth noting:
In London in the 1990s the Jubilee line extension had the effect of raising land values surrounding the new stations. The beneficiaries of this increase were the landlords and property owners occupying these sites, who were able to raise their rents or sell their properties for a considerable profit, even before the work was complete. It is recorded that the revenue derived from the increased land values could have easily paid for the construction of the project, otherwise financed by the taxpayers, not only in London, but throughout the country (2).
Also in London the Crossrail project has given rise to a significant increase in house prices near the proposed stations, since its inception in 2009. Reports by several organisations show increases in residential values of up to 60% in certain locations. (3)
The project will not be completed until 2019, but in the meantime large ‘windfall’ profits have accrued to existing property owners, or to those who have bought into the right locations in anticipation of future increases. These profits can be realised at any time even before a single train has started to run. Thus, the return on the investment in the form of ‘economic rent’ may be collected, in advance, by others who have contributed nothing to the financing or construction of the project.
(2) See: ‘Taken for a Ride’ by Don Riley.
(3) Moneywise article:
City AM article: