CAPITAL REDEFINED
FOR all the alarm about the “rise of the robots”, or “software eating the world” or the peril of climate change, one of the most pressing economic dangers of the future is getting short shrift: landlords are eating the world.
There is growing concern that wealth inequality has skyrocketed, and that capital income accounts for a growing share of the economic pie. This was the theme of Thomas Piketty’s Capital in the TwentyFirst Century. But though we usually think of “capitalists” as they were defined by Karl Marx – owners of corporations – we forget that land is also a form of capital, which means landlords (and homeowners) are capitalists, too. Furthermore, according to Matt Rognlie, an economics PhD student at the Massachusetts Institute of Technology, it is land, not corporate capital, that has been responsible for most of the increase in capital’s share of income.
This increase is happening worldwide. An Economist report showed the share of residential property value as a percentage of gross domestic product has skyrocketed in European countries since 1950. This is bad for the economy. To understand why, we have to look at the reasons land has value in the first place. For most of human history, the value of land came mainly from the value of its natural productive power. But in the modern age, land has value for a very different reason, summed up by the real estate mantra, location, location, location.
In a city or suburb, land’s value comes from location. People want to be close to the companies where they work. Companies want to be close to the people they employ. Shops want to be close to the consumers they serve and vice versa.
Companies in the same industry want to be close to one another, so they can keep an eye on rivals, absorb ideas and poach talent. And people want to be close to other people in general, so they and their children can have friends, enjoy culture and meet their romantic partners.
As our economies become more complex, there are more kinds of shops, more cultural activities and more industries to cluster together. So the value of location increases, which pushes up the value of land. It doesn’t matter how much empty land is out there – who wants to live on the Kansas prairie? What matters for the value of modern land is the incentive to locate close to other people.