Chapter 31: Land and Rent
Update: 4/13/20
The Lord God planted a garden eastward, in Eden, and there he put the man whom he had formed. Out of the ground the Lord God made every tree to grow that is pleasant to the sight and good for food. This included the tree of life that was in the midst of the garden, and the tree of the knowledge of good and evil. A river went out of Eden to water the garden. From there it divided and became four rivers. The name of the first is Pishon. It is the one which flows throughout the whole land of Havilah, where there is gold. The gold of that land is good. There are also bdellium and the onyx stone (Genesis 2:8–12)To Adam he said, “Because you have listened to the voice of your wife, and have eaten from the tree, concerning which I commanded you, saying, ‘You may not eat from it,’ cursed is the ground because of you; through painful work you will eat from it all the days of your life. It will produce thorns and thistles for you, and you will eat the plants of the field” (Genesis 3:17–18). .
In Genesis 2, we learn that God gave Adam life and resources. Adam had free access to the garden of Eden. There were rivers flowing out of the garden that would have taken him and his descendants out of the garden and across the region. We are specifically told that the river Pishon would take them to the land of Havilah, which was noted for its gold, bdellium, and onyx stone. These were raw materials they would eventually have great value, and by the time that Moses wrote the Pentateuch, the value of these raw materials was well understood.
Genesis 3 provides the account of the fall of man. It also provides the account of God’s judgment on the world. The world was originally designed to enable mankind to be highly productive. But, after the fall of man, God’s negative sanction against the world involved new plants that would make man’s productivity more difficult. God imposed restrictions on man’s productivity. These restrictions were also restrictions on men’s ability to achieve long-term per capita wealth.
The curse of the ground involved restrictions on mankind’s ability to extract wealth from the land. But there had always been restrictions on extracting wealth from the land. Prior to the fall of man, mankind faced finitude. Man’s knowledge was finite. Man’s environment was finite. The curse of the ground in Genesis 3 added new restrictions on the ability of men to extract wealth out of the ground, but in a finite world, there is no such thing as a free lunch. For every benefit, there is a cost. Prior to the fall, these costs were not threats to mankind, but they were limitations.
The dominion covenant requires that man extend his dominion across the face of the earth. But man is not autonomous. He always acts as an agent of God, whether he acknowledges this or not. The limitations of the garden prior to the fall would have led to economic incentives for Adam and his descendants to leave the garden. There was limited space. Therefore, built into the dominion covenant was the principle known as the law of variable proportions. As more people began to inhabit the land, the productivity from the division of labor would initially have risen, and then it would have declined. As more human labor was added to the mix, people would have been getting in each other’s way. As with any other complementary factor of production, as more labor was added to the mix, its contribution to the total output of the production process would have fallen. The marginal value of labor inside the garden would have declined.
Eventually, biological multiplication would have had the effect of reducing the living space available to families. This would have increased the value of living space inside the confines of the garden. Prices of real estate would have risen. Families would have bid against each other for possession of specific plots of land. Initially, the uninhabited land outside the garden would have been available to anyone who wanted to settle it and begin developing it. This land would have filled up soon. This would have created an incentive for families to construct inexpensive small floating barges to transport themselves and their possessions down one of the four rivers.
The more rapid this biological expansion, the more rapidly the world outside the garden would have been inhabited and put to productive use. God’s promise of biological reproduction was therefore a promise regarding the increasing value of land outside the garden. It would have paid some members of Adam’s family to leave early, stake their claims to productive and desirable land, and develop it. This is the traditional role of land speculators. They forecast future demand for specific kinds of land, and they go out in search of such land in advance of immigrants into the region.
The land of Havilah had valuable resources. Adam would not have known the details of why these resources were good, but he understood that God’s description of the land and its resources as being good was a reliable indicator of their future value in a growing society. God had imputed economic value to these assets, and Adam should have been confident that God’s imputation was accurate.
The mineral and chemical details of these resources were not available to Adam. There was no demand yet for these resources in a competitive marketplace for scarce economic resources. Physical resources were not yet scarce because there was only Adam. He had all that he could manage inside the garden. His crucial scarce resource was time. He had to develop a plan for a sequence of development of the resources of the garden. He would have allocated his time to developing resources without any price system. Not until there were multiple families in the region would competitive bids for ownership have led to a system of prices that enabled decision-makers to allocate their scarce time and scarce resources to future productive uses. In a world of scarcity, the auction process would have developed out of any legal system that enforced the rights of ownership. The tree of the knowledge of good and evil was the supreme manifestation of the rights of ownership.
Adam knew from the beginning that he would have to restrict his consumption of the resources of the land in order to provide capital. He knew he would have to save time, and he also knew that anything he consumed would have to be replaced. He needed an investment plan. This was not an immediate problem. He was alone. But he understood that God had given a command to mankind, which would eventually be both male and female. There would be population growth. There would be consumption. Eventually, mankind would begin to run low on resources in a finite world if men were not creative in replacing lost resources through innovation and discovery. The first resource they would run low on was living space, but that was just the beginning. Therefore, the concept of land from a biblical standpoint always involves the concept of depletion. After the fall, the issue of resource depletion became even more of a critical issue. The earth now resists mankind’s attempts to extract wealth out of it. Scarcity is now cursed. What had been a relatively minor problem before the fall became a major problem.
God said that the land of Havilah was good. He did not say anything comparable about the rest of the earth. This indicated from the beginning that there were variations in the value of land. Some pieces of land would be more valuable than others. Some resources found in the specific plots of land would be more valuable than resources in others. In describing the promised land, Moses spoke of it in these terms: a land flowing with milk and honey. This meant that other lands were not flowing with milk and honey. God would give Israel the best land available.
Because different lands had different assets, it was inevitable that a division of labor would develop. Specialization of production would develop. People living in one region would gain a competitive advantage by specializing in the extraction of local raw materials and assets constructed with these raw materials. People would profit from trade with people who lived in other regions. By specializing in production, they would increase their output per unit of resource input. That is because geologically unique resources locally would be able to be extracted at a lower cost than what comparable resources could be extracted for in other regions. The world would have more resources at its disposal because of this regional division of labor.
Transportation by water remained the least expensive form of transportation until the development of railroads in the second quarter of the nineteenth century. The four rivers flowing out of the garden of Eden would have carried people downstream until they found land that was suitable for their particular talents. The combination of specialized skills of production and an unequal distribution of resources across geographical areas would have led to an even greater specialization of production and division of labor. People were different. Resources were different. Costs of transportation were different. Even before the fall, these differences would have led to an extensive development of lands outside the garden. Humanity would have spread out across the face of the earth in pursuit of greater output per unit of resource input. People search for bargains, and there are few bargains as desirable as low-cost land containing scarce resources that will have high future value.
Initially, there would not have been monetary bidding for land outside of the garden. There were not yet enough people to bid against each other. The quantity of locally available land would have been high in relationship to the number of people. Under these circumstances, land has low value, and human labor has high value. People assess their skills and opportunities, and they invest time in developing these skills. The rate of return on the investment in skills is greater than the return on the investment of land wherever land is in abundant supply and human labor is not. In modern times, the greatest disparity between the value of labor and the value of land was in the United States from about 1800 to 1900. The Great Lakes provided low-cost transportation for agricultural products. Then came the invention of the railroad. Within one century, Americans filled the nation. Land west of the Allegheny mountains was the highest value, lowest cost land in the world in 1830. Labor was valuable by comparison. Millions of people came across the Atlantic Ocean to claim ownership of this land, especially after 1875 with the development of the steamship. It got cheaper to cross the Atlantic. Biological reproduction rates were always high in the United States. The railroad system constantly raised the value of land as it spread across the nation after 1840. The transcontinental railroad connected the coasts after 1869. In 1800, the population was about five million. In 1900, it was 75 million.
You are familiar with the phenomenon of rent. It is associated with real estate. But rent as an economic category is not limited to real estate. Economic theory is marked by extending the economics of rent to the economy in general. It understands the economics of land rent as an application of a more general economic principle. It is time to discuss this more general economic principle.
1. A Stream of Services
When someone buys a capital asset, such as a household appliance, he is buying a stream of expected services. He may pay cash for the machine, but he is not buying the machine for its own sake. He is buying a stream of services that the machine is expected to provide. There may even be a written guarantee that the machine will supply such services over a specific period of time. This is no different conceptually from buying a piece of land that is expected to supply services over time. People pay in advance for an expected stream of services.
When people buy a plot of land, they calculate in advance what they think the hoped-for services or benefits of the piece of land will provide over the period of ownership. This may be ten years. It may be a century. Buyers subjectively impute value to this stream of income. They cannot be sure that the stream of benefits will be continual. They may have to intervene in order to repair the land in some way. There are always unforeseen events that disrupt our expectations. Nevertheless, people estimate what they think the benefits will be from owning a piece of land. It may be the equivalent of an ounce of gold a year. It may be the equivalent of ten ounces of gold a year. They do not wish to pay more for the land than the expected value of the stream of income that the land will provide.
2. The Rate of Interest
We cannot escape the rate of interest. We discount by the rate of interest the value of any expected future stream of income provided by any asset, including land. This is because the present value of a distant stream of income is worth less than the present value of a more immediate stream of income. This is not just a matter of risk. It is not just a matter of the possibility of the interruption of an expected stream of income. This is more fundamental. We discount the future expected value of every stream of income.
If someone is considering the purchase of a piece of land that he expects will deliver an ounce of gold a year in benefits, and he thinks these benefits will continue for 50 years, he will not pay 50 ounces of gold to buy the land today. Why should he? He already has all of the benefits that 50 ounces of gold will buy today. He is responsible for the use of that money today. Personal responsibility is greater in the present than in the future. The responsibility associated with the allocation of scarce resources is immediate, not in the future. We are held accountable by God for the allocation of His resources while we own them. The opportunities are immediate, not merely in the future. So, we place greater value on present opportunities than future opportunities. God expects an immediate rate of return on his capital. He wants that capital’s value to grow steadily between now and then. Therefore, the value of His resources had better turn out to be greater in the future than they are in the present. So, we discount the future in comparison with the present. When we are buying a present resource in order to gain a future benefit, we expect a benefit of greater value in the future than what we surrender in the present. This is what God expects from us. So, if the present value of the expected stream of income is one ounce of gold a year, we discount the present value of all those hoped-for future ounces of gold. Those future ounces are not worth as much today as the same number of ounces are worth today.
3. Capitalization
When I say “capitalization,” I mean this: you can buy a stream of income, which is a fixed rent over a period of time. It does not matter what the source of this stream of income is if the risk of default is the same. The mathematics are the same in both cases. You must factor in the interest rate to make an accurate calculation. If a piece of land is expected to generate a monthly stream of income of 1,000 currency units for over 30 years, and a 30-year bond is expected to generate the same amount of monthly income for 30 years, the present price of the bond will be the same as the present price of the piece of land. If you can get the same income from a bond as you can get from a piece of land, you should not pay more for the piece of land than you pay for the bond. If you did, you would be throwing away money. God does not want us to throw away money. It is His money. To see what you should pay, use a financial calculator. Here is what to enter. N = 360 (number of months), I = 5 (annual interest rate = 5%), PMT = 1000 (monthly payment). Solve for PV (present value, i.e., what you should pay today). Answer: -186,281.62. The number is negative because you must pay it. It is outflow. In order to purchase a stream of income totaling 360,000 currency units over a 30-year period at 5%, you should not pay more than 186,281.62. These numbers are the same whether you are buying a bond or a piece of land.
I use this example to show that the rate of interest applies in exactly the same way to any stream of income. The mathematics of this process are not understood by most people. With free online financial calculators, investors today can learn about the effects of interest on transactions. This has opened up the world of finance to anyone who wants quick answers to what used to be highly complex transactions that were understood only by specialists in finance. The cost of this previously arcane knowledge has fallen. The barrier to entry has been lowered substantially by financial calculators. The many uses of these calculators are taught online for free. The formulas that make possible these calculators do not have to be known by the people using the calculators. Finding answers is simply a matter of entering numbers. This means that a crucial process in estimating the impact of time (interest) in financial affairs has been revealed to people with normal intelligence. They can cross this barrier with information that is free online. This is a far lower barrier to entry than existed in the days when discount numbers were available only in pages of tables in obscure manuals used by bankers and sophisticated investors. Before these tables, there were formulas that only a handful of specialists knew. Step-by-step, a working knowledge of the time value of money is being made available to people of average intelligence who want to make wise economic decisions. This is a tremendous benefit that the free market has made available to the public.
God provided mankind with capital. The primary form of capital is redemption: special grace. Next comes life. Next comes knowledge. If we regard responsibility as a burden and a liability, then we do not see it as capital. But if we regard it as the Bible regards it, as an opportunity to serve a holy God, then responsibility is capital. It is opportunity. There is no opportunity without responsibility. The goal of the dominion covenant is to increase mankind’s exercise of personal responsibility in history and eternity. Responsibility is a permanent condition of mankind. The opportunity to learn more is an opportunity to exercise greater responsibility. This increase is an aspect of spiritual maturity. Old age, which is universally regarded as a liability, is primarily marked by a decrease in people’s ability to exercise responsibility. Their income declines because their ability to make responsible decisions declines. We think of the liabilities of old age mostly in terms of reduced physical capacity. But the risk of Alzheimer’s disease, which increases as we get older, reminds us that the far greater liability associated with old age is the decline of knowledge and therefore the decline of responsibility.
We should interpret God’s grant of land to Adam and Eve in the context of the dominion covenant. This land grant should not be understood apart from the issues of ownership and personal responsibility. Land is a tool of production. Knowledge is a greater tool of production. Land is physical. Knowledge is not. To make land productive, people need highly specialized knowledge. But this is also true of every grant of resources by God to man. Knowledge is far more universal in wealth creation than land is.
In the history of mankind, land has generally been seen as the primary economic resource. This was because most people earned their living from the land. Their specialized knowledge was focused on the land. This has become far less true since about 1900, as economic growth has become more clearly based on knowledge in the form of technology and innovation. But the centrality of technical knowledge and entrepreneurship was always the case. It was always entrepreneurship, vision, and innovation that converted the raw materials buried in the land into productive resources. This is another way of saying that it was knowledge that converted land into wealth.
Wealth comes in the form of streams of income. This is another way of saying that wealth comes in the form of rent. Modern man still associates rent with land, especially housing, but this is a matter of history rather than economic analysis. Economic analysis applies the economics of rent, which includes the discounting of the value of future streams of income by an interest rate, to all forms of income-generating assets.
The vast majority of mankind in history learned the principles of rent and capitalization by means of economic decisions associated with agriculture. A minority learned these principles in mining. This was not true of traders, but traders have always been a minority in the human population. Land became the primary arena of economic competition, and therefore it was the schoolmaster of economics. This began to change in the middle of the 1800s, and this change has accelerated ever since. Very few people generate streams of income through agriculture today. The enormous efficiency of technology in agricultural production has reduced the percentage of people who obtain their income from agriculture to low single digits in industrial nations. As wealth spreads into poverty-stricken rural areas in the Third World, this same transformation will take place. Land will no longer be the schoolmaster of economic principles in Third World nations. It has not been the schoolmaster in the West since 1900.
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The full manuscript is posted here: https://www.garynorth.com/public/department196.cfm