Land Ownership
TLDR: Utopians are Georgists. Space in Utopia is leased out to land-owners with a tax rate set by auction, similar to how radio spectra are auctioned today.
Prerequisites: None
Market capitalism is excellent at efficiently allocating scarce resources. This can take the form of figuring out who should get particular goods, but it also means efficiently allocating the scarce resource of people’s time and attention. In the absence of a deep sense of altruism, humans will naturally work towards their own betterment. And in the absence of money and deep trade networks, bettering the self means paying attention to whatever makes life locally more pleasant. When hungry, we obtain food, when tired we rest, when bored we socialize watch Netflix.
But money and trade allows for powerful win-win relationships that improve the lives of everyone involved. In the classic story of comparative advantage, we consider two parties that are specialized differently. Alice may be specialized as a cook, while Bob is specialized as a farmer. Even if Alice is a better farmer than Bob, it still makes sense for Bob to focus on farming and Alice to focus on cooking and for Bob to trade uncooked food to Alice in return for cooked food. Comparative advantage, the associated gains from additional specialization (and economies of scale), and the win-win dynamics produced are the short answer to how the world has grown rich.
Individuals are nudged into their comparative advantage by a combination of their own abilities/inclinations and the market price of various things. Prices are essentially a coordination mechanism that allows each person to work towards what they expect is the way they can do the most good for society. By default, the highest-paying job I can get (and do well at) is the most valuable work I can be doing for society — it’s the work that I have the highest comparative advantage at, and which therefore creates the most wellbeing in the aggregate sum of everyone in the market. If I can be a doctor or a line cook I should be a doctor, not just because it’s best for me, but also because it’s what’s best for others.
Or at least, this is how things are supposed to work. Real capitalist systems tend to have several points where this narrative breaks down.
Perhaps the most obvious gap in the story is the discrepancy between purchasing power of the rich and poor. In theory this can be mitigated by narratives of meritocracy that I won’t bother repeating here because they’re pretty fake. The sad truth is that there’s a large degree of luck in who is wealthy and who is not, and that luck goes on to harm the degree to which price signals capture aggregate social value. Luxury goods don’t produce anywhere close to the same level of utility per dollar as a bottle of painkillers or a refrigerator.
Another major flaw with capitalism is in un-captured externalities. By default it might be more profitable to pollute than to run a clean factory, or to run a bunch of loud advertisements that most people hate. These are examples of negative externalities, where there are some costs to an activity that are not reflected in the price that a local actor has to pay. But there are also positive externalities that involve a benefit that is not reflected in the local payment an actor can receive. For instance, it is very hard to capture the benefits of basic scientific research in a direct paycheck — the ideas developed by scientists simply spread too freely.
The last major flaw in market capitalism that I’ll discuss here is that not all money-making activities are win-win trades. A win-win could be seen as move that grows the metaphorical pie. Let’s call these pie-growing activities “profit-seeking.” But consider that being a burglar can also be a way to get money, and while that particular activity is illegal, there are other activities such as conning people to join a pyramid scheme that are comparable and (often) legal. Other means of getting money that are either zero-sum or negative-sum include winning lawsuits, winning market-share through advertising (assuming the product isn’t superior), filing patents, getting special-interest pay-outs from the government, and collecting rent from land. Many of these could be seen as activities with negative externalities, but I think it makes sense to consider them as distinct from things like polluting or using up some common good.
In the literature, activities like trying to win lawsuits or lobbying for hand-outs is called “rent-seeking,” in contrast with the profit-seeking described earlier. I actually don’t like the term, as I think it’s unintuitive to think of things like advertising and patents as about “rent,” which I typically associate with the money paid to an owner by a borrower, but the word rent in economics refers generally to “unearned revenue.” I find it hard to determine what counts as “unearned”, and am perhaps confused on this topic, but the distinction between activities that create wealth and those that simply move it around (perhaps destroying wealth in the process) makes sense to me. And, because it fits in nicely with the topic of this essay, I’ll continue to call the latter class of activity “rent-seeking.”
Rents and Incentives
One of the most important lessons of economic design is that incentives matter, and that prices, whether they’re profits or rents, are an incentive. This is the standard story for why patents are a good thing: while holding a patent in some sense produces “unearned” money by creating a monopoly, it is only thanks to the patent that the process of inventing has economic value. In the absence of intellectual property, so the story goes, there would be no (or at least less) reward for invention.
Likewise, while a civil lawsuit may cost many hours of skilled labor simply to move assets from one party to another (thus being negative-sum), the possibility of being sued can create an incentive for people to be diligent rather than negligent, true to their contracts, and kind to each-other.
Are these positive-incentive dynamics true for all rent-seeking? No. When special interests compete for protections, subsidies, and favors from the government, the only side-effect is the collective impoverishment of the people. Advertising over a fixed consumer base resembles a dollar auction, so that not only are the consumers not benefitted by having their attention constantly jerked around by advertising, but even the businesses involved can lose out in the end. (Advertising is complicated, and I don’t want to imply that in reality it’s as simple as I just made it sound. I’ll likely do a full essay on it later.)
What about the classic instance of rent-seeking: trying to become a landlord. Are the rents collected by landlords good for the world or not? I think it’s a mixed blessing.
On one hand, there is genuine value to renting out houses and offices. A clear example at one extreme are hotels — it would be absurd to force people to buy an entire building in order to spend a single night in some distant city. By allowing landlords to rent out property, we open up new markets to people who don’t want to commit to owning a building or who can’t get a loan, and this seems good.
On the other hand, land is scarce, and in some cases extremely so. It is extremely hard to find new plots of land to develop in a city like New York. As a result, landlords in such places tend to be extremely wealthy and are also able to charge extremely high rent prices to tenants, further increasing their wealth. Normally, when a price is that high it works as an incentive for increased production, but with land there is often no way to produce more.
In fact, this observation — that it is virtually impossible to create new land — is the basis for “land” as an economic term. For (Georgist) economists, “land” means anything in the natural world which is fixed in quantity. This is a bit silly in some ways. For example, farmland is not land (it merely occupies land), because we can build more farms if we choose. But radio-frequencies are land, because nothing we do will cause there to be more possible wavelengths for light.
Using this observation we can see that insofar as landlords are getting benefit from providing buildings, this is good, because it encourages new buildings. But insofar as landlords are benefitting from land, this is bad, because the high prices don’t encourage anything, and merely siphon money from the (typically) poor into the pockets of the (typically) rich.
Objection!
I think it’s a bit wrong to say that there’s a fixed amount of land, and I want to be up-front about that wrongness. For instance, I recently enjoyed reading about a proposal to artificially extend the island of Manhattan. In a strict sense economic “land” should describe something like “segments of volume relative to Earth,” which would mean that building out an artificial island simply changes the value of that space, rather than “creating more land.”
Regardless of the details of the technical language, however, what is scarce is often not segments of volume — it’s usable, dry land where a house can be built! So if our story is that high housing prices are due to a scarcity of (usable, dry) land, and but those high prices don’t successfully incentivize the creation of more land, that’s just false.
Indeed, this falsehood isn’t limited to wacky things like artificial islands. High land costs in a town create a pressure to develop nearby natural areas into buildings. In the absence of high prices for real estate it’s likely that no new developing would take place.
It’s worth noting that this blade cuts both ways. Natural spaces are a common good. I don’t know anyone who thinks the entire planet should get paved and turned into suburbs. If we can, we should investigate policies that correctly incentivize people to reduce their footprint on the natural world, and slow down urban sprawl.
Another reasonable objection to the narrative that high land prices are (uniquely) bad, and increase inequality through high rents, is that the obvious response is rent control. But rent control is terrible. I agree. Competition over houses (and other buildings) is good, and imposing a price ceiling on the market hurts the long-run quality of rental properties and disincentivizes people from adding more rental properties to the market. Fewer houses for rent on the market hurts all the people who want a new place, and makes the whole situation worse.
Note the distinction between the hard-to-increase land, and the easy-to-increase housing. Rent control means that the expected profits from converting a warehouse to an apartment building are suppressed, or for leasing out space above a shop. There are a hundred different ways to make more rental opportunities, but very few ways to create more land (and they’re often very expensive and ecologically damaging).
Manhattan will never be a cheap place to live. There are simply too many people trying to live in the same place. But there’s a difference between the profit that’s made by converting a property into a more efficient form and the rent that’s collected by land-owners who do nothing to improve the lives of their tenants.
Enter Georgism
I believe we could do much better as a society, in the task of fairly allocating land, by essentially setting up a large tax on all land. The primary goal of this tax would be to make it unprofitable to speculate on land or use it for anything than the most economically productive activity. This school of thought is called Georgism, named after 19th century economist Henry George. For a thorough rundown of George’s ideas, I strongly recommend this award-winning book review of Progress and Poverty.
In a typical Georgist system, land values are assessed regularly by the government and a property tax is set at the (slightly under-)estimated price of renting the land for one year. Note that this is the price of renting the land, not the buildings and/or any other improvements to the land like crops, roads, et cetera.
With the tax on land being so egregiously high, the value of land becomes very low. Owning an unused lot becomes a burden, rather than an asset, and so land speculation becomes unprofitable, especially in areas where real estate is in high demand. The only reason to own land is if you can use it for economically-productive activity, such as farming, living space, or office space.
Another framing of Georgism is that instead of private individuals owning land, which is then taxed, the government is the sole owner of all land, which is then rented out to individuals. I like the simplicity of this frame, and it feels like the right-way-round to me, but I’ve been told that the optics are terrible — people are far more likely to accept a story where there are high land-value-taxes over a narrative where everyone pays rent to the government.
But another part of why I like the frame of the government owning all land, and simply leasing out the rights to individuals, is that it feels kinda morally correct to me. Philosophically, we often base property-rights in the observation that if a person creates a thing, they should have the rights to it, else they won’t have incentive to create it. But for the most part land isn’t created — it’s found. And it seems somewhat unfair that the first person to find a place somehow has a right to it compared to all those who come after. Worse, in most places in the world land wasn’t obtained via “discovery” as much as conquest and colonialism. The current owners of the land may not have stolen it, but they bought it from someone who bought it from someone… who ultimately stole it.
In a world where government owns all land and charges rents for the use of that land, which can then be redistributed to investing in the betterment of society… well, it feels more right, in addition to the economic benefits.
Utopian Real Estate
In my conception of Utopia, all spaces on Earth are owned by the government. By default, government spaces are for public use, with protected rights-to-travel and camp, as long as people don’t damage the natural world. There are occasional areas owned by particular government agencies, to host government offices, roads, or parks, which have restricted use. But for the most part public land is freely available to the public.
Individuals and companies can lease a 3D volume of space from the government called a parcel. Parcel-holders have the right to build on land in their parcel, extract minerals and other natural resources, restrict access to that area, and more. Leases can be freely sold, sub-divided, re-licensed, or simply abandoned in the case where the original leaser decides they no longer want the parcel.
To lease a new parcel from the government, a party must submit an application drawing up the specifics along with a small fee. At regular intervals (~165 days) the government hosts an auction for all the parcels that they’ve received applications for. Bids in these auctions are made in the form of money-per-unit-time, and reflect a rate of rent for the parcel. In the case where two applications overlap, or where an application eats into an existing parcel (that’s on the market), the intersection is auctioned off as a distinct parcel.
Parcel auctions follow the general format of a simultaneous multi-round auction: bidders anonymously submit bids for each of the parcels during some fixed period (“one round”). After each round, the highest price offered is revealed (though who offered that amount is still kept anonymous) and anyone who wasn’t the high-bidder or didn’t bid drops out and is unable to bid in future rounds. All the remaining participants can then bid on parcels again, with a minimum bid of 37/36 times the high-bid (except for the high-bidder, who only needs to re-bid their previous bid on the following round). This continues until each parcel only has one high-bidder, after which the high bidder is revealed and gains the lease for that parcel.
For example: Alice wants to build a house along a street that currently only has one other property. Alice submits a parcel application to the government, which happens to overlap with an existing parcel currently held by Bob. Alice’s proposal eats into some of Bob’s yard, so two parcels are up for auction: the intersection of Alice and Bob’s parcels, and the part of Alice’s parcel that doesn’t overlap with Bob’s.
Bob wants to keep his yard, but otherwise doesn’t care if Alice starts building a house down the street. Alice submits a low bid of $150/year on the unoccupied parcel, to make it over the government’s reserve price on the empty space, and a $1/year bid on the intersection parcel. Meanwhile, Bob submits a bid of $400/year on the intersection. At the end of the round it’s revealed that the high-bid on the intersection is $400/year and the high bid on the other parcel is $150/year.
Another round starts. Bob bids $400/year again, and Alice bids $150/year again for the uncontested parcel, but Alice also bids $500/year on the intersection. The $500/year price is revealed, and on the following round Bob ups it to $514/year (which is approximately the minimum price he can bid). This goes back and forth for a while until Alice decides to drop out — Bob wants the parcel more than her. At this point Alice could also decide to drop out of the other parcel’s auction, if she felt that without part of Bob’s parcel it wasn’t worth it for her to build on that street. Bob then wins the lease for the portion of his parcel that was contested, and pays whatever his high bid was to the government as rent on that land.
When a lease is first won in an auction, the land in question is protected for a little over 16 years. Protected leases cannot be eaten-into by parcel proposals by other people. At the end of a lease’s protected period, the lease-holder continues paying rent to the government at the rate they’ve established. Parcel-holders are of course free to open their parcels up for another auction after the protection fades, to renew the protection, and many people in Utopia do this.
To ensure that the auction price reflects the value of the land, rather that improvements like buildings, the government offers a free service to anyone who loses the rights to a parcel they were leasing via an auction: demolition of everything on their parcel. Thus if Bob were to lose the part of his parcel that includes his house, he could move away and have the government tear his house to the ground and dispose of the materials. Buildings aren’t the only thing the government will destroy — everything from orchards to mines can be destroyed at will. In most cases, however, the previous owner of a parcel will sell the improvements to the auction winner.
The government also provides free moving services to those who are forced off their land, to ease the burden on displaced individuals.
This auction system is a means by which the fair taxation rate can be set for a piece of land. If one party can do something very profitable with some land, they will get the land and compensate society as a whole. The tax revenue from parcel auctions can be extremely high, and is used to fund public goods like parks and roads, as well as being returned to citizens of Utopia in the form of a universal basic income.