George on land speculation and the winner's curse

American Journal of Economics and Sociology, The,  Nov, 2004  by Nicolaus Tideman

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Adam Smith knew about the neutrality of taxes on land. He says of a tax on land, "As it has no tendency to diminish the quantity, it can have none to raise the price of that produce. It does not obstruct the industry of the people" (1937 [1776], p. 780). Smith's view of taxes on land has been the general view among economists since then, and in fact one can trace Smith's argument to the French physiocrats who preceded him.

Henry George claimed more for a tax on land. He stated that taxing land has not only the virtue of not stifling production the way other taxes do, but also the virtue of eliminating land speculation. He wrote:

   And to shift the burden of taxation from production and exchange
   to the value or rent of land would not merely be to give new
   stimulus to the production of wealth; it would be to open new
   opportunities. For under this system no one would care to hold
   land unless to use it, and land now withheld from use would
   everywhere be thrown open to improvement.

   The selling price of land would fall; land speculation would
   receive its death blow; land monopolization would no longer
   pay. Millions and millions of acres from which settlers are
   now shut out by high prices would be abandoned by their
   present owners or sold to settlers upon nominal terms. And
   this not merely on the frontiers, but within what are now
   considered well settled districts. Within a hundred miles
   of San Francisco would be thus thrown open land enough to
   support, even with present modes of cultivation, an
   agricultural population equal to that now scattered
   from the Oregon boundary to the Mexican line--a distance
   of 800 miles. In the same degree would this be true of
   most of the western states, and in a great degree of the
   older eastern states, for even in New York and Pennsylvania
   is population yet sparse as compared with the capacity
   of the land. (1960 [1879], pp. 436-437)

George's claim is much more than the claim that taxes on land are neutral. Where Smith's claim of neutrality is readily seen to be compatible with modern economic theory, George's poses more of a challenge.

Before addressing George's claim in terms of modern economic theory, it is important to note first its empirical foundation. George observed a widespread practice of people taking title to much more land than they could use and leaving it unused. Earlier, in Progress and Poverty he wrote:

   We have hitherto assumed, as is generally assumed in elucidations
   of the theory of rent, that the actual margin of cultivation always
   coincides with what may be termed the necessary margin of
   cultivation--that is to say, we have assumed that cultivation
   extends to less productive points only as it becomes necessary
   from the fact that natural opportunities are at the more productive
   points fully utilized

   This, probably, is the case in stationary or very slowly progressing
   communities, but in rapidly progressing communities, where the swift
   and steady increase of rent gives confidence to calculations of
   further increase, it is not the case. In such communities, the
   confident expectation of increased prices produces, to a greater
   of lesser extent, the effects of a combination among landholders,
   and tends to the withholding of land from use, in expectation of
   higher prices, thus forcing the margin of cultivation farther than
   required by the necessities of production.

   The cause must operate to some extent in all progressive
   communities, though in such countries as England, where the
   tenant system prevails in agriculture, it may be shown more
   in the selling price of land than in the agricultural margin of
   cultivation, or actual rent. But in the United States, where the
   user of land generally prefers if he can, to own it, and where
   there is a great deal of land to overrun, it operates with enormous
   power.

   The immense area over which the population of the United States is
   scattered shows this. The man who sets out from the Eastern Seaboard
   in search of the margin of cultivation, where he may obtain land
   without paying rent, must, like the man who swam the river to get a
   drink, pass for long distances through half-tilled farms, and
   traverse vast areas of virgin soil, before he reaches the point
   where land can be had free of rent--i.e., by homestead entry or
   pre-emption. He (and with him, the margin of cultivation) is forced
   so much farther than he otherwise need have gone, by the speculation
   which is holding these unused lands in expectation
   of increased value in the future. And when he settles, he will, in
   his turn, take up, if he can, more land than he can use, in the
   belief that it will soon become valuable; and so those who follow
   him are again forced farther on than the necessities of production
   require, carrying the margin of production to still less productive,
   because still more remote points.

   The same thing may be seen in every rapidly growing city. If the
   land of superior quality as to location were always fully used
   before land of inferior quality were resorted to, no vacant lots
   would be left as a city extended, nor would we find miserable
   shanties in the midst of costly buildings. These lots, some of
   them extremely valuable, are withheld from use, or from the full
   use to which they might be put, because their owners, not being
   able or not wishing to improve them, prefer, in expectation of
   the advance of land values, to hold them for a higher rate than
   could now be obtained from those willing to improve them. And,
   in consequence of this land being withheld from use, or from
   the full use of which it is capable, the margin of the city
   is pushed away so much farther from the center. (1960
   [1879], pp. 255-257)