Thursday, February 28, 2013

Land Prices, Wages and Interest Rates

We have so far examined what determines the value of the services of land and its price on the assumption that the number of workers and the amount of investable funds are given. In reality neither is ever given; both are subject to constant change.
We shall examine the effects of changes in the supply of and the demand for capital and labor later on. Here, only a few preliminary remarks.
If the supply price of labor, i.e. the wage demands, declines, more workers can be employed, as explained earlier. Given a certain amount of land, each worker will then have less land to work on. The law of diminishing returns works in the opposite direction. The productivity, i.e. the labor-replacing capacity of the land, becomes greater. The rent from land increases.
If the supply price of capital, i.e. interest, declines, the cost of production declines. But the cost reductions vary according to the length of the production detours. With short production detours costs decline to a lesser degree than they do with long production detours, because capital costs enter into the former less than into the latter. Now the use of land means a long, in fact an infinitely long, production detour. If somebody borrows money to buy land, he has to pay interest on this money in eternity in order to profit from the land's equally eternal and not amortizable benefits.
For this reason a lowering of interest rates must mean a very substantial reduction in the cost of the use of land. This reduction in costs will result in sub-marginal land becoming marginal. This land will now yield a revenue even though its technical productivity has not risen. All land prices will go up until the—now lower—interest on the—now higher—prices is again equal to the rent.

Common Sense Economics

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