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The marginalists who confronted land
American Journal of Economics and Sociology, The, Jan, 2008 by Fred E. Foldvary
Is land "special"?
Each factor of production is "special" in having unique characteristics that are important in its contribution to the production of wealth. Labor is special because, if there is no slavery, then each worker is self-owned, and labor can only be hired over time and not owned by another persons. Capital goods are special because they are produced and are owned as well as hired. Land is special because it is a natural resource, not created or altered by human action.
None of the factors of production have any special theory associated with them. The same theories of supply and demand, of elasticity, of marginal productivity, and of equilibrium or disequilibrium apply to all the factors.
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Thus, Carl Menger (1871: 169), founder of the Austrian School, stated: "The existence of the special characteristics that land and the services of land ... exhibit is by no means denied.... [Land] is fixed as to situation." Menger (1871: 167) accepted as an application of general economic theory the classical Ricardian theory of differential land rent. Menger wrote, however, that Ricardo "brought to light merely an isolated factor having to do with differences in the value of land but not a principle explaining the value of the services of land to economizing men."
The land factor is divided into several types of land that have different characteristics. The supply of material land differs from that of spatial land or wildlife resources. Territorial space, the three-dimensional surface of Earth, is fixed in supply on Earth, and therefore has no cost of production; but that characteristic is not true of other types of natural resources. The fixed supply that makes territorial space special as a subfactor is also true for other subfactors. There is for capital goods a fixed supply of antiques, and for labor a fixed supply of Mason Gaffneys. What makes the characteristic of a fixed supply special for space is that all matter has to be located in space, while we can live happily without antiques.
Another special feature of space is that there are economies of density and proximity associated with some locations. Thus, by its necessity and productivity, land ownership is an entry monopoly, in that entry into the land business is possibly only by the transfer of title, as it is impossible to enter the spatial land business by increasing the supply.
Mason Gaffney (1994) has presented the case that the neoclassical turn deliberately buried land. But just as land cannot be physically hidden, its rent cannot simply be ignored. In macroeconomics it is masked as part of interest and profit. In microeconomics, rent is masked as the producer surplus. Most teachers of economics don't examine the paradox of there being no economic profit in a long-run competitive equilibrium, and yet the firms allegedly get a producer's surplus, which is an economic profit. The paradox goes away when we realize that the surplus does not go to the owners but flows through as a return to the land factor.
But several of the economists of the neoclassical turn did recognize the importance of land and its rent. This does not contradict Gaffney's proposition but actually complements it, to show that the first neoclassical economists did not sweep land out of economics but rather it was subsequent landed interests who hijacked economics in order to make land invisible.
I
The Neoclassical Turn
THIS CONCEPT OF marginal utility was pioneered by Jules Dupuit in papers published from 1844 to 1853, in which he developed the distinction between marginal and total utility and their relationship to demand and prices.
The key theoretical insight of the neoclassical turn was the relationship of marginal utility and price. As stated by Menger (1871: 139): "The value of a particular good ... is thus for him equal to the importance of the least important of the satisfactions assured by the whole available quantity." The price one is willing to pay for another liter of water depends on the subjective value of the next liter, having already consumed some usual amount.
This is similar to the theory of marginal productivity, by which a factor is paid its marginal product, not its average product. The crown of marginal analysis is optimality, that benefits are maximized where marginal costs equal marginal benefits.
When marginal analysis became mathematized, it was simpler to use two factors, and rather than use land and labor, the original factors, mathematical economists used labor and capital, as capital goods could change while land was fixed. But some of the marginalists and their predecessors did not lose sight of the special role of land in economic theory and in the economy.
II
Hermann Heinrich Gossen (1810-1858)
THE GERMAN ECONOMIST Hermann Henrich Gossen developed a theory of consumption based on marginal utility, published in Entwicklung der Gesetze des menschlichen Verkehrs, und der daraus fliessenden Regeln fur menschliches Handeln (The Development of the Laws of Human Commerce, and of the Consequent Rules of Human Action), published in Brunswick in 1854. Gossen's thought included the principle of diminishing marginal utility (the law of satiable wants, Gossen's first law), the conditions for maximizing utility (that of the marginal utility of a unit of money being equal among all goods, Gossen's second law), and the relationship between diminishing marginal utility and the law of demand.
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