Sunday, June 03, 2007

Three Unproductive Drains of Value: More on Land

My study of the use of comoddities as a backing for money (or as money, itself) has given me a better understanding of what the problem is with land.

A thing has a use. The more people who want to use a thing, the greater the demand. The price of the thing is determined by the demand in relation to the supply. So, for example, if lots of people want toasters, and there aren't many toasters on the market, the price will be high. The result of this is that computer manufacturers will profit, encouraging others to enter the toaster industry, while buyers of toasters will take good care of their toasters so they don't have to replace them, resulting in more left for others. This will result in an increase of supply, which will result in a lower price. This is the typical rationale for capitalism: price works well for dealing of problems of scarcity.

Gold also has uses. You can make electrical contacts. You can make jewelry. Good does not tarnish. I'm sure there are many other uses for gold. And gold follows the same market dynamics as anything else: low supply and high price results ultimately in increased gold mining, which raises the supply, which lowers the price.

However, gold is also used as a store of value. Whenever investors are unsure of the future of the dollar and/or the stock market, they start buying gold. When prospects look good, they tend to sell their gold and buy other things with the proceeds. This use of gold as a store of value is yet another demand; the price of gold is influenced not only by industrial and commercial use, but by its financial use, as well. If we suddenly went from a gold market in which it is only used for its industrial uses to one that uses it as a store of value, the price would go up until production increased sufficiently to meet the new demand.

An example that could well end up happening is the Liberty Dollar. Silver is also used as a store of value, in addition to having uses as jewelry and in photography. However, the Liberty Dollar Organization is attempting to put silver into circulation as a barter medium. This adds an additional demand. The Liberty Dollar goes up with the value of silver. However, if the Liberty Dollar becomes popular, the demand of the LDO for silver will likely end up raising the price, in and of itself.

Land is the same. It is a vital component in wealth generation; no economic activity can take place without land. Because of this, land has a very stable value, one that increases steadily as the economy grows. Because of that, people use land as a store of value. Many buy land not for their own use, but simply so they can sell it at a profit at a later date. In the meantime they may or may not allow others to use it in exchange for rent. The existance of blighted regions is evidence that land investors are not always quick to lower their price to a level people are willing to pay.

When gold, silver, or toasters are used as a store of value, the price goes up. This stimulates production, and the price eventually reaches an equilibrium. This is not the case with land, because land is, by definition, not something that can be produced. If it can be, it is not land. The use of land as a store of value raises the price, making it more difficult for people to establish homes and businesses, thus raising unemployment and/or reducing people's economic independence. However, because land cannot be produced, there is no process that lowers the price of land.

A rise in the price of gold results in increased profits not only for those who are currently holding gold, but also increased activity in gold mining--more jobs, more profits, which ultimately spills over into other areas of the economy as investors in mining look for ways to spend their increased profits. A rise in the price of land has no such spillover benefits. Indeed, higher land prices results in a reduced rate of job creation, because the most vital component of any business plan--land--is harder to get. Fewer people can buy it, thus fewer people can start homes and businesses.

If the use of land as a store of value could somehow be reduced (and I will get to that), it would result in more opportunites for self employment, less urban blight, more efficient land usage, and thus more jobs. More jobs is another way of saying more demand for labor, which means the price of labor (wages) would be higher.


Anonymous said...

On a side note, you might be interested in hearing about what can happen to a currency that is not backed by anything with intrinsic value. Look no further than Zimbabwe, with is in danger of complete and total ruin. It's an amazing case study.

The government, already on the road to ruin, printed money to cover the gaps of deficit spending, and, naturally, inflation was the result. 4000% estimated for 2007. That's not a typo. It even printed money to pay off the IMF.


Tarvok said...

The thing about money is that, it isn't so much the intrinsic value of the substance on which it is based that provides the value of money. Money has a network value above and beyond the underlying base. By "network" value, I mean how many people are willing to use it as a medium of trade. The other factor is how disciplined the issuer is.

For example, during the colonial period in America, Ben Franklin issued what he called "colonial scrip." It had no specific base, but was rather simply a mechanism of trade, that served the area (I don't know how widely they were used) in place of British specie, which was deliberately scarce as a result of British monetary policy. Apparently, he was pretty good about not over-issuing.

The thing about an underlying physical backing (or actual composition) is that the market provides the discipline that can easily be lacking in an issuing authority. If there isn't enough circulating, the value rises and people get to mining and trading in an attempt to provide more. If there's too much, the price lowers and these same people do other things, instead. When more currency is needed, the benefit goes to miners, as opposed to a fiat system, where when more is needed, the benefit goes to bankers and/or bueraucrats. In other words, hard money is a pro-labor position!

With an unbacked, "authority" based currency, there is the constant risk of over issuance. Even when you have a well disciplined issuing authority, the benefit of new money entering the economy goes to the elite, rather than the people.