Monday, February 25, 2013

The Price of the Services of Land

There remains, of course, the question of the pricing of land. Its price will obviously depend on the services land offers to entrepreneurs, including in particular agricultural entrepreneurs, i.e. farmers—just as in a slave society the price of a slave would depend on his services. In a society of free men, of course, only the services have a price and not the man who renders them.
Land, just as capital, is useful to the entrepreneur because it replaces work. This seems paradoxical at first sight, for in raising a crop land does not merely replace labor but is indispensable. It can never be replaced even by the greatest number of workmen. But the absolute absence of land is a limiting case that can be neglected for analytical purposes.
Given a certain area of land and certain amounts of labor, every addition of land for cultivation will increase the productivity of the existing workers and thus replace workers, just as every additional worker will increase the productivity of the existing land and thus replace land.
However, here too we meet the law of diminishing returns, as in the case of the productivity of capital discussed above (p. 40). The productivity of a given number of workers cultivating land of a given quality will increase with the addition of more and more acres, though in a decreasing degree.
Entrepreneurs will obviously be prepared to bid for the service of every additional unit of land an amount as high as the wages of the workers that the addition of this unit can replace. Given a certain supply curve of land services the price of the service is herewith determined.
Land serves not only production but consumption too. A nation's most important durable consumer good is its housing stock. Houses cannot be built on air—they have to be built on land. The value of urban landed property depends on how much of their income consumers are willing to spend for living in certain districts. In essence the problems involved are the same as those we have been discussing earlier in connection with the choice between the consumption of apples and pears.

Common Sense Economics

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