Political Economy of Land Economics

1. Political Economy of Land Economics The Ghosts of Natural Resource Economics Past Wednesday, January 18

2. Thomas Hobbes (1588-1679)

3. Thomas Hobbes • Each of us is motivated to act in such ways as we believe will relieve our discomfort, preserve and promote our own well-being. • The natural state of human beings is in perpetual struggle against each other. • To escape this fate, we form the commonwealth, surrendering individual powers to the authority of an absolute sovereign. • The will of the sovereign for its subjects will be expressed in the form of civil laws that are decreed or tacitly accepted. • If individuals make private judgments of right and wrong based on conscience, succumb to religious enthusiasm, or acquire excessive private property, the state will suffer.

4. John Locke (1632-1704)

5. John Locke • “Natural Law” – men have “natural rights” not given to them by any ruler • Rights in property are the basis of human freedom • Government exists to protect these rights and to preserve order • Men organize under a “social contract” to gain advantages not available individually

6. Locke This Contract of Society was the foundation of the Contract of Government, under which all political power is a trust for the benefit of the people, and the people themselves are at once the creators and beneficiaries of that trust. The State is based on a contract between ruler and subjects, who give him power only so that their own welfare is increased and their property protected in a way not possible in the State of Nature, where it may be taken away by unprincipled forces.

7. Political Economists • Study of land gave emphasis to role of governments in defining and protecting property rights • Adam Smith • David Ricardo • Thomas Malthus • Karl Marx • John Stuart Mill

8. 1808-1873 Mill 1818-1883 Marx 1766-1834 Malthus 1772-1823 Ricardo 1723-1790 Smith 1632-1704 Locke 1588-1679 Hobbes

9. Adam Smith (1723-1790)

10. Ownership of land is essentially nonproductive Returns to land ownership are unearned Secure, individual ownership might lead to improvements Q = f( L, K) L = labor K = capital Wages – returns to labor Profit – returns to capital Rent – returns to land (natural capital) Adam Smith

11. David Ricardo (1772-1823)

12. David Ricardo • Owners of land may earn rent. • Scarcity rent • When land is homogeneous in quality but scarce • Differential rent • When land is of different qualities; more fertile land produces more/earns more.

13. Understanding Rent • Farmer Smith • Poor land – max 10 bushels per acre of corn • Farmer Jones • Fertile land – 100 bushels per acre of corn • Capital costs – $10/acre • Labor costs – $40/acre

14. Summary – Understanding Rent

15. Ricardo • Is rent unearned income? Or is rent a legitimate cost of production that gets included in the price of the good produced? • Conclusion: rent arises because of price of product, is a residual and is unearned

16. Thomas Malthus (1766-1834)

17. Thomas Malthus • Population increases at geometric (exponential) rate • Food supply increases at an arithmetic (linear) rate • Food supply (and hence, population) constrained by natural productivity of limited land supply

18. Labor Theory of Value The value of a product is determined by the amount of labor used to produce it.

19. Karl Marx (1818-1883)

20. Karl Marx • Capital and land are essentially unproductive without labor • Capital is the product of labor exerted previously • Private ownership of land allows owner to extract unearned rent • Improvements to land exploit labor, taking away resources that should go to workers

21. John Stuart Mill (1806-1873)

22. John Stuart Mill • Inherent fallacy in labor theory of value • Theory of Demand • Landowner can use land to produce good in highest demand and increase his income • Opportunity costs • Private ownership would result in land being used in highest valued use

23. Mill • Private persons should be allowed to hold title to land, not because there is any moral or natural right for them to do so, but because society as a whole is likely to benefit from the incentives which private land ownership hold out • Land owners hold their land at the sufferance of society and in trust for society • Landowners should be legally compelled to manage land in a way consistent with the public good

24. For further information: • http://www.utm.edu/research/iep/m/milljs.htm • http://csf.colorado.edu/psn/marx/Bio/Marx-Karl/km1869a.htm • http://www.ucmp.berkeley.edu/history/malthus.html • http://www.bized.ac.uk/virtual/economy/library/economists/ricardo.htm • http://socserv2.socsci.mcmaster.ca/~econ/ugcm/3ll3/smith/farrer.html • http://www.johnlocke.org/whowasjl.html • http://www.philosophypages.com/ph/hobb.htm

25. Assignment for Monday Jan. 24 – Read Field Chapter 2, “Natural Resources and the Economy”