Land as a factor of production - Chapter 2

American Journal of Economics and Sociology, The,  Dec, 2002  

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Introduction

A BRIEF SURVEY OF CONTEMPORARY INTRODUCTORY TEXTBOOKS in economics indicates that the classification of the factors of production utilized by classical political economists has been retained. To land, labor and capital these texts occasionally add entrepreneurship. The returns to the factors--rent, wages and interest (as well as profit)--are explained in rough accordance to usage of more than 100 years. When more advanced texts in microeconomic theory are examined, however, the accordance disappears.

In the March 1928 issue of the American Economic Review, Clark Warburton examined prominent textbooks of the time, comparing and contrasting the economic terminology employed to describe the factors of production and the distributive shares. Taking the terminology used by John Stuart Mill as a model, Warburton found a wide divergence in the usage of the terms and noted a tendency to retain the tripartite grouping of the factors while recognizing that it was both vague and misleading.' One of the inherent problems that accounted for the wide differences in approach was that there were differing views of capital and interest. Another problem was the question of the relationship of land to capital. Although these questions are clearly interrelated, I will discuss the narrower question in the following manner: Is land an independent factor of production? Should the terminological distinction between land and capital be retained for analytical purposes? Is the distinction important for welfare considerations?

The position of land in theories of value and distribution had been debated for many years prior to Harry Gunnison Brown's entrance into economic studies. The questions noted previously had generated an interesting distribution of opinion among the political economists who preceded Brown as well as among his contemporaries. Because for Brown these questions and their various answers constituted an important element in his thought and work, I will survey this distribution, arbitrarily beginning with Alfred Marshall and concluding with Brown's American colleagues. In reviewing these opinions, I will attempt to point out relevant tendencies in the arguments without critiquing individual positions in detail.

Views of English and Continental Political Economists

ALFRED MARSHALL'S SOMEWHAT EQUIVOCAL POSITION is familiar. His statement that the rent of land is the "leading species of a large genus" (2) breaks away from Ricardo's thought. Yet, he modified this statement with "though, indeed, it has peculiarities of its own which are vital from the point of theory as well as practice" (3) and in the same article said, "And even there in a new country land must be regarded as a thing by itself from the ethical point of view." (4) Marshall's views on land and rent were challenged by several economists, some of whom will

be noted later. Francis Edgeworth followed Marshall's lead and viewed land as a form of capital to the individual but not to society. (5)

However, Edwin Cannan traced the usage of three "requisites of production" in English political economy and argued that by 1848 the triad "was not quite firmly established." (6) He identified the origin of the terminology with Adam Smith but noted that Smith's successors varied considerably in their approaches. James Mill, for example, identified only labor and capital as "requisites." Later in Cannan's A Review of Economic Theory, he maintained that the attempt to distinguish land from other forms of property was futile. (7) Philip Wicksteed, despite a lifelong sympathy for land nationalization programs as well as a friendship with George, viewed land as a "tool" co-ordinate with other factors in the determination of distribution and, as Mark Blaug has pointed out, appeared to overlook the relative fixity of the supply of land. (8) Mason Gaffney has argued Wicksteed's contribution was simply a "mathematical insight" which should not be taken as proof that Wicksteed did not view land as fundamentally differe nt in the Ricardian fashion. (9)

Knut Wicksell discussed the question of whether land should be included with capital. He concluded that the tripartite division of the factors was justifiable. (10) Wicksell approved of Henry Seager's definition of capital as the produced means of further production. This, for Wicksell, distinguished capital from land and labor a priori as they are not "produced" in the same sense as is capital. Furthermore, he viewed interest as an organic growth out of capital in contrast to wages and rent; although rent may be expressed as a percentage, like interest, this was "something derivative and secondary." (11)

In a similar manner, Gustav Cassel defended the traditional classification. He noted the assertion that the classification was due to particular social conditions in England wherein the classical theory evolved but stated that "this classification is without doubt in complete accord with requirements of a theory of pricing, and that its place in theoretical economics is fully justified." (12) Cassel distinguished between natural and "produced" land and argued that the price of the former is a secondary result of the pricing process, in that rent is capitalized with respect to the current rate of interest.