Comments on "Echoes of Henry George in Modern Analysis"

American Journal of Economics and Sociology, The,  Nov, 2004  by Fred E. Foldvary

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As Mason Gaffney (1994, p. 93) puts it, land speculation has two effects. In what Gaffney calls "type A," buyers "force the future" by developing for future rather than present-day demand. "Type B landowners hold land unused or underused" and "free-ride on the future."

This leads back to the question of whether the winner's curse in land speculation implies that, as Tideman states, a pure free market does not efficiently allocate site resources and patterns of site development. Does the pure free market fail? We need to first avoid the error made by many critics of free markets and realize that actual markets have been skewed by intervention. Hence, the outcomes we see are not those of pure markets. In particular, when government provides the civic infrastructure, including public works, security, schooling, and recreation, all this is capitalized into land values, and when the expectations of the continuation and expansion of such civic provision leads to holding land idle for future gains, this is no free-market outcome. In a pure market, there would be no taxation of labor and capital as such. The owners of real estate would need to pay for the civic services they use from private if not governmental providers, and this would come out of their rental revenue. Thus, much of the capitalization of the civic infrastructure would deflate and be gone.

Second, a pure free market would have atomistic agents bidding for sites not in economic isolation but rather in the context of organized civic communities. With all public goods provided by private-sector proprietary firms and voluntary civic associations, the apartment house or office building would be under the contractual governance of a proprietary or civic community that would have a stake in the rents and site values (MacCallum 2003). The members and proprietors would seek to maximize their rental income, which would lead them to charge for sites according to the potential current rent rather than the rental the title holder happens to get. For example, the company that maintains the streets, parks, recreation, and street lighting is not going to let a site ride free on the services just because it is currently a parking lot.

The pure free market would thus induce efficient land speculation, as overly optimistic landholders would face explicit carrying costs that would make them confront economic reality. Moreover, the landholder would sometimes be a proprietor in possession of a whole business district and thus make development decisions that internalize the infrastructure externalities and could more easily reverse past errors with reconstruction. Large-scale owners of real estate would have boards, shareholders, and executives with diverse views, which would tend to reduce the winner's curse of the single owner.

Thus, while Henry George regarded the public collection of the land rent by government as the remedy for land speculation, the speculation that has occurred historically due to the winner's curse cannot be ascribed simply to market failure, since markets have been mixed with intervention, and pure markets would harness much if not all the rental for civic uses. In either case, the free market does not fail.