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

Thomas Hobbes ( )

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.

John Locke ( )

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

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.

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

Locke Smith Ricardo Malthus Marx Mill Hobbes

Adam Smith ( )

Adam Smith 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)

David Ricardo ( )

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.

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

Summary – Understanding Rent Corn Price Jones 100 bu/acJones RentSmith 10 bu/acSmith Rent $.50/buTR = $50TC = $50NoneTR = $5TC = $50 $3/buTR = $300TC = $50$250TR = $30TC = $50 $5/buTR = $500TC = $50$450TR = $50TC = $50None $8/buTR = $800TC = $50$750TR =$80TC = $50$30

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

Thomas Malthus ( )

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

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

Karl Marx ( )

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

John Stuart Mill ( )

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

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

For further information: Karl/km1869a.htm s/ricardo.htm th/farrer.html

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