Roger Sandilands wrote:
> In response to Pat's post, here is how I would distinguish entrepreneurship from speculation in land: 
>  
> 1. If I expect the demand for and price of shoes to rise relative to costs, I would invest in the production of shoes and in the process I would help bring the price of shoes back down close to the costs of production. This is entrepreneurship.
> 2. If I expect the price of land to rise faster than the normal return on other ways that I might invest my money, I would park my savings there. So would other people, and so long as these expectations persist the price of land will continue to increase. Our expenditures do not increase the supply of land, so a rise in its price has no tendency to be reversed through a rise in its supply. This is what makes land unique. Purchases of land -- whether by speculators or entrepreneurs who want it because it is needed to produce shoes or whatever -- are merely transfers of existing title deeds. However, if the price of land is driven up, this increases the land element of entrepreneurs' production costs. These rising costs eat into entrepreneurs' profits. Production will slow, and this weakens entrepreneurs' demand for land. As land prices begin to soften so too would the speculative demand for land. Land values will eventually fall and this will help a recovery of profits on real
>   production, but no thanks to the 'work' of speculators.
>   


Roger, I do not disagree with your logic. But I do not believe that it 
is reasonable to assume that the price of land will rise faster than the 
normal return on other things or even on the return to particular uses 
of land determined by profit-seeking entrepreneurs.If this were not 
true, you would be a superior speculator on land and would receive a 
gain due to your ability to predict a future value of land in a 
particular use that differs from the uses to which the land would 
otherwise be put. By holding the land, you prevent it from being put to 
an inferior use. You assume that the price of land is magically driven 
up to heights that are unrealistic, given the price you must pay for 
land in order to bid it away from entrepreneurs in the first place. Let 
me explain further.

I would bet dollars to donuts that the mere holding of land does not 
yield an average return over a long period that is equivalent to or 
greater than the interest rate on triple A bonds. Although I do not know 
the figures, my guess is that the return on owning land is quite a bit 
below the rate of interest. Can you show otherwise? My belief is the 
source of my assertion that you assume that land prices magically rise 
to unreasonable heights.

Now, assuming that the return on parking your money in land is not equal 
to or greater than the average return on other assets, it is not 
sufficient to merely own land. You must use it for some purpose for it 
to be a profitable place to park your savings. Moreover, if you fail to 
use it in nearly the most profitable way it can be used, you will earn 
less revenue than could be earned by the highest appraising 
entrepreneur. Remember that entrepreneurs are in the business of trying 
to earn profit from their appraisals and uses of land. They are not 
parkers of funds.

Let's step back a bit to the time at which you bought the land. Since 
the entrepreneur who appraises the land highest would have bid against 
you for the land in the first place, it must be true that, given the 
price you had to pay for the land, your gain from using the land as you 
do (in a less profitable way than is possible) would yield a less than a 
normal rate of return. It would yield an economic loss. In a perfect 
capital market, you would do better by lending your money to an 
entrepreneur. (It is possible that you would have parked your funds in 
land and that an entrepreneur would only later have attached a much 
higher appraisal to it. In this case you would not have competed with 
the entrepreneur in your bidding for the land in the first place. Once 
the entrepreneur changes his appraisal, he may proceed to bid a 
substantially higher price for the land than you paid. In this case you 
are lucky. You gain from the entrepreneur's judgment. But, of course, 
you cannot count on being lucky when you park your funds in land. If you 
could, the return on holding land would be greater than than the market 
rate of interest.)

When I wrote that the entrepreneur view emerged from the turn of the 
century American literature on capitalization, I meant that those turn 
of the century economists conceived of the land issue (and other assets) 
in this way by conceiving of competing appraisals of land (estimating 
the present value -- the process of capitalization).

There is no denying that in some markets for land some of the time, 
people who hold land and use it inefficiently make a return that is 
greater than the rate of interest. They are lucky. But there are also 
many unlucky people who hold land and lose money over long periods of 
time -- in relation to what they could have earned either by using the 
land more efficiently, as determined by the appraising entrepreneurs, or 
by selling it off to the highest bidding entrepreneur. The latter people 
would have been better off holding their wealth in a different form.

Regarding the tax issue, which I assume is your ultimate concern, here 
is a slightly jaundiced entrepreneur view. If a government taxes only 
surface land, regardless of how it is used, entrepreneurs will economize 
on its use by building skyscrapers and 7-story basements. Homemakers 
will live in balloons, sewers, and houseboats, assuming that these 
living quarters are not regarded as land. If the government taxes space, 
then entrepreneurs will economize on space by building beds that convert 
into refrigerators and shops that convert into dining rooms. The shop 
toilets would have showers. The new uses of the land and the space are 
not efficient. Nor is it just that owners of the resource "land" or 
"space" are taxed while the owners of other resources are not.

Best wishes

Pat Gunning