A good place to start is with the three factors of production identified by the Classical economists – land, labor and capital. That sounds simple enough; but the problem is that there is great deal of confusion about what they properly include. The challenge with economics, or at least one of several, is that the terms that are used are in some cases not well defined or mean different things to different people. That leads to difficulties and is partly at the root of the inequities in our economic system.
Let’s start with the most basic – land. What do we understand by that term? An urban dweller might have one view and an upstate resident another. The fact is that land, all land, is the dry surface of the planet. It includes the land under the office buildings in Manhattan, the land underlying suburbia as well as agricultural land and that given over to forestry uses. There are important aspects to this. The first is that land is a vital natural resource fundamental to our well-being; after all, we are land animals. It was here before us and will be here after we have gone.
It is important to distinguish between raw land and improved land. By improved land, we mean land with the benefit of roads, utilities and other infrastructure which have been constructed by society. The point is that at the outset, buried in the mists of time, all land was raw or unimproved and as society developed we have made significant alterations.
What is relevant here is that the raw land was provided by the Creator at no cost to society. We, society, have made improvements, some at public expense: roads for example, and some at private expense: the buildings that we occupy as offices or homes. It is easy to overlook the fact that the value of a property comprises three elements, the value of the underlying unimproved land, the value of the building and the value attributable to the other improvements such as the roads, utilities and public services.
The values are not broken out separately and all accrue to an owner on sale of the property. From an economic standpoint this is a key consideration since society has not and does not seek reimbursement for the costs incurred in making these public improvements. We should appreciate the fact that the real estate taxes we pay contribute towards the maintenance of these public improvements rather than their initial capital cost.
There is another important aspect to land: it is immobile, unlike labor and capital, and it is also for all practical purposes fixed in terms of its supply. The use of land can change through the action of re-zoning, but it can also change with the passage of time through the operation of natural forces, for example prolonged drought or climate change. This immobility has important economic implications.
Lastly, in relation to land, it embodies all the natural processes associated with raw land. These are now described as ecosystem services, a somewhat clinical term that includes a whole raft of naturally occurring activities such as plant growth and photosynthesis, air and water purification, pollination and many others. The point is that all these activities, which are vital to our welfare, are provided free of charge by Mother Nature. We use or abuse them at our peril.
That these ecosystem services are freely available to us is not a consideration that current economic theory adequately addresses. We will return to this in later posts and in the next post will look at land and labor as the two other factors of production. — Chris Wood is the Head of Economic Studies for the School of Practical Philosophy, New York.