The Boom/Bust Cycle

• Henry George on the Root Cause of Recessions

• Picturing the Boom/Bust Cycle

• Land Rent and Selling Price

• Progress and Poverty

• Site Map

• Understanding Economics

by Mike Curtis

In a free market, products exchange for a value equal to their cost of reproduction. Assets which cannot be reproduced, but yield an income (like a license to sell alcoholic beverages) are valued through a process called capitalization.

Parcels of land with the potential to yield an income fit this category. Because they cannot be produced, their price cannot be determined by cost of reproduction. So, the selling price of a parcel of land is based on a comparison between the potential income from that land and the amount of capital that would be needed to yield a similar income. This process, called "capitalization," is standard in real estate circles.

However, in many cases the income from a parcel of land increases faster than the profits from the ownership of capital. In that case, if the owner of a parcel of land agreed to sell it for a price based on its current income, she would forego the increased profits which would have been retained by not selling.

Seems like a pretty good deal, but... if the house came to be sold for $150,000 four or five years from now, would the land still be free?

Although land is usually offered for sale at an advertised price, it is generally sold for less to the highest bidder. And it is rarely sold for a price based on its potential to yield an income in the present. The buyer will tend to be the person with the greatest expectation of the site's future profits.

There is no way to predict with certainty what the potential profits of a site will be in the future. Therefore, there is no existing set of facts from which to precisely calculate what anyone will pay for a parcel of land in the present. In times of land booms, when land prices are rising rapidly, this prediction gets less and less precise.

As the selling price of land gets bid up higher and higher, owners of unused land become that much more tempted to hold thier land out of use. Then businesses find it more profitable to down-size, rather than expand their productions. As the unemployed workers buy fewer products, the reduced demand reverberates throughout the economy and a recession/depression is under way.

Land Value Taxation and Land Prices

If the entire rent of land were taken in taxation, there would be no rental income, hence nothing to capitalize, and no selling price. Land that yielded no income would not be worth investing in. It would still be worth having, however -- for the opportunity it provides to producers. Therefore, a 100% tax on land rent would destroy the selling price of land, and thereby destroy any profit that could be had from land speculation. But land would still have a rental value, as long as people were willing to pay for its use.

Henry George advocated collecting something less than 100% of the rent of land. He recommended that a small percentage, say 5%, should be left to the landowner, which would in turn be capitalized into a selling price (albeit a much smaller one). The advantage of this would be to ensure that free-market forces set the value of land, and to keep government out of the business of making land-distribution decisions.