Content provided in partnership with
Business Services Industry
Keeping land in capital theory: Ricardo, Faustmann, Wicksell and George
American Journal of Economics and Sociology, The, Jan, 2008 by Mason Gaffney
Note also that the SFF accumulates the rent of the forest site, year by year with interest, into the value of the final product, S. This is a point on which the great Knut Wicksell insisted, but that most other economists have omitted. Even Wicksell never expressed it as compactly or correctly as Faustmann in Equation (2). Ohlin hit on it in 1921, but never developed it, and apparently never checked the forestry texts to credit Faustmann's finding of 72 years earlier.
- Most Popular Articles in News
- The Ten Best Laptop bags
- Tata plans cheapest-ever car for Indian market
- GLOBALIZATION AND THE DEVELOPMENT OF UNDERDEVELOPMENT OF THE THIRD WORLD
- Corn is good for you; Corn is not only a tasty treat, but also a cereal that ...
- THE 50 BEST STYLISH HANDBAGS TO CARRY
- More »
To simplify the notation, I will now consolidate the items in the brackets into one, calling it net stumpage, or NS. Note, however, that these items may include a lot more than the P value I am making invisible. There may be any number of intermediate costs and revenues at times other than time zero and time n, the ones shown explicitly. Just compound each item forward to year n, using the appropriate number of years in each case. That makes them commensurable so you may add (or subtract) them together. Furthermore, these intermediate revenues may be falling, rather than rising to a climax as in the forestry case. Thus, the formula can be adapted to apply to factories, office buildings, milk cows, or anything. The idea is to consolidate all intermediate values at one point in time, n, and then levelize them into Bodenrente. Now we have:
B = NS x SFF (3)
This levelized Bodenrente applies to years zero to n. To capitalize the rent in perpetuity, divide Equation (3) by i. Faustmann called this the "Site Expectation Value" (Bodenerwartungswerte). (In fact, that is how he originally derived his formula, which one may derive in several ways.) Dividing by i cancels the numerator of Equation (1), so we have:
Site value = NS/[[e.sup.in] - 1] (4)
The pesky little "-1" in the brackets in the denominator of Equation (4) makes the difference between the discounted cash flow (DCF) of one generation of land use, and the DCF of infinite repeating generations of land use.
Foresters have preserved Faustmann's formula in a few texts, but have not taken kindly to it. That is because it contains compound interest, which most foresters (not all) wish would go away. They dislike it because timber culture is so capital-intensive that it needs a low rate of interest to justify itself in competition with rival uses of land and capital--and foresters are in the business of justifying timber culture. Instead, they generally prefer another performance standard that Germans call Waldrente, and Anglophones call forest rent. This is NS/n, where P is not compounded forward to year n but just subtracted from S as though they were simultaneous (so NS = -P + S). This, of course, results in higher values of forest rent.
We will soon see that this forest rent is the same as Faustmann's ground rent where a zero interest rate is applied. I have seen no evidence that foresters derived it that way, or understand the relationship, although surely some do. Many of them, however, disparage Faustmann's result as coming from putting mathematical or green-eyeshade values, which they scorn, above forest values, which many embrace rather too romantically. Let us not scoff, for they are sensitive to collateral forest values that one-dimensional financial "rationality" easily neglects. Rather, let us see what economists can learn from this.
