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Keeping land in capital theory: Ricardo, Faustmann, Wicksell and George
American Journal of Economics and Sociology, The, Jan, 2008 by Mason Gaffney
It is common to interpret Jevons as anti-Ricardian. This may be a case of Jevons's protesting too much, in his introduction, to differentiate his product from Ricardo's. It may also be a case of one critic copying from another who copied from another, and so on; for if we read Jevons himself, he writes that his views "on this subject are in fundamental agreement with those adopted by Ricardo; (which they are) ... (as opposed to) some later economists" (1957: 222). He then replicates Ricardo's points as cited above ("Theory of Capital," Ch. 7, esp. 222-245).
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Austrian economists picked up on Ricardo's basic idea, and gave him credit by describing their finding as "Ricardo effect." They invented their own terminology, writing of "higher and lower orders of capital." Their treatment of land is somewhat negligent and incidental; yet their "period of production" idea implies a sharp distinction between capital, which has one, and land, which does not. It was for this underlying reason, according to Stigler, that J. B. Clark and Frank Knight feuded so long and intransigently against Austrians Bohm-Bawerk, Friedrich von Hayek, Fritz Machlup, and others (Stigler 1941: 278). Clark and Knight aimed to wipe out any bright line, or any line at all, between land and capital. If libertarianism and anti-Marxism were the dominant issues, Chicagoans and Austrians would merge in mutual admiration and support. Instead, rampant Chicagoans let Austrians survive mainly on the margins of the profession.
III
Martin Faustmann and Other Forest Economists
MARTIN FAUSTMANN was a German forest economist, writing in 1849, who undertook to find the annual value of a forest site yielding a periodic future stream of revenues. The aim was to find the "highest and best use" (as we say today) of the site; to make commensurable different uses with different yields over different time periods and with different costs. He called this measure Bodenrente (ground rent). Anglophonic foresters call it "soil rent," but soil per se is only one of several components that make forest sites yield rent: rain, temperature, slope, hours and angle of sunshine, and access to markets are as or more important. I will denote it by "B," for Bodenrente, and Anglicize it as ground rent or site rent. (See Table 1.)
Faustmann began with the planting cost (P) of a tree at time zero. He compounded this forward to the time (n) of harvest, using a market rate of interest (i). Compounding P makes it commensurable with the net value of the harvest at time n (S, for stumpage, which is the sale value less the cost of harvest). Finally, he annualized (or "levelized," as some prefer to say) this value by multiplying it times the sinking fund factor (SFF). Algebraically, we now have:
SFF = i/[[e.sup.in] - 1] (1)
B = [[-Pe.sup.in] + S] x SFF (2)
Note that we now have labor, capital, and land compressed into one expression; and maximizing this expression is a performance standard, that is, the highest and best use of land subject to market wage rates (included in P and subtracted from S) and a market interest rate (found in in and the SFF).
