18 Clark: apostle of two-factor economics - Part III: nineteenth-century Americas critics

American Journal of Economics and Sociology, The,  Nov, 2003  by Kris Feder

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Meanwhile, let us suppose, each young settler plans to work for forty years, then to sell his land and retire. He earns wages for his labor. He enjoys a small imputed rent from the use of the land that he owns, and he looks forward to receiving a large capital gain from the sale of his land at retirement. However, he has interest cost to pay. He must have paid the initial $50 land price either by depleting his savings or by taking a mortgage. If he drew down his savings account to buy land, then (at 5 percent) he is losing $2.50 annually in interest that his savings would otherwise have earned. If he borrowed to buy land, he is paying $2.50 annually out of pocket to service the mortgage.

The years pass. Each individual buys perpetual ownership of an extent of land, spends his working life using resource flows and consuming resource stocks, and finally sells perpetual ownership of what's left to a member of the next generation. As population grows, the average individual necessarily buys a smaller proportion of the earth's resources, and the relative price of land rises to ration demand. However, all this was perfectly foreseen by the first settlers. Each paid $50 not because he expected to receive $50 worth of land services during his tenure, but because he calculated that forty years of land services plus the capital gain he would eventually receive at sale would, together, sufficiently compensate him for the interest cost of land purchase. He cannot, though, hope to get more than enough to compensate him, by the law of competition.

There is no danger of wasteful land speculation. A land buyer can return normal interest on his investment only if he uses his property to its best advantage. No one can profit by buying land, holding it idle, and eventually selling at a higher price. To break even--to repay principal and mortgage interest on the value of the investment--the owner must employ the land at maximum efficiency during his tenure so as to extract the potential rent income. By withholding from use land that has a positive current rent, a speculator incurs a loss.

As population continues to grow, each generation pays more for land than its predecessors. Yet none is disadvantaged. Like the first settlers, new entrants have unlimited access to financial capital at 5 percent, and they know that forty years of imputed rent income plus the capital gains they will receive at retirement will just compensate them for the interest cost of their investment. Taking into account the lifetime flows of both imputed rent income and interest cost, each individual buys only the land-time that he uses and uses only the land-time that he buys. Land titles are perpetual, but on balance, each settler pays only for what he takes. Everyone buys low and sells high, yet no one enjoys a windfall gain. *

There is a further complication. The expenditure side of the government budget can also potentially bestow unearned gains on privileged individuals and impose losses on others. We therefore add a final assumption: Let the state exercise its absolute authority by using the interest income from the original land sale to provide public goods to which everyone in every generation has equal access. Its wise investments increase the value of land in the realm, but of course these gains, too, are already capitalized in land prices, so they bestow no special benefit on landowners. In this world, Clark was right--a system of absolute, perpetual private property in land can do no harm. Analytically and practically, it is equivalent to the single tax!