[MUSIC] Okay so far so good. We defined pure economic rent and shown that land rents are determined by the interaction of supply and demand just as in the other markets. But what really distinguishes land from most other factors of production. To really understand this, let's get into our time machine and travel back to two controversies in 19th century history, the Corn Wars in England and the single tax movement in America. In 19th century England, English consumers became increasingly concerned about the rapid escalation in the price of various cereal grains. That they called corn. The question is, why was the price of corn rising so rapidly? The most common explanation was that, landlords were raising the rent they were charging farmers for the use of their land, thereby forcing farmers to pass on the increase in land cost to consumers. In this scenario, landlords were the clear villains. However, one of the great classical economists, David Ricardo, had a different explaination. Ricardo said that the price of corn is not high because a rent is paid. Rather, rent is high because the price of corn is high. In this scenario the root cause of the problem was, increased demand for corn, which in turn was driving up rent for corn land. These figures illustrate this debate, in the left-hand figure we have the market for acres of corn land and in the right-hand figure we have the market for corn. The corn controversy was based on the assumption that rising land rents would in turn lead to an upward shift of the corn supply curve in the right-hand figure, making landlords to blame for high food prices. But what's wrong with this picture? Well as David Ricardo pointed out and as we have previously learned supply decisions are based on marginal cost, not fixed costs, such as the cost of land. Instead Ricardo envisioned the following chain of causality. In the left hand figure we now have the corn market, in this market there might be an increase in demand as the English population grew. As demand shifts upward from D1 to D2, price increases from P1 to P2 and quantity increases from Q1 to Q2. This in turn would increase the demand for land, from D1 to D2 and rents would rise from R1 to R2. Now look at what we've just done. We've illustrated that an increase in price in the product market, in this case corn, results in an increase in the price of the factor of production. In this case land. And note that, we will find this to be the case for all factors of production when we discuss this point more fully in the next lecture. Now, looking at this result, one might still conclude that landlords are unfairly benefiting from the situation. After all, these landlords would be just as willing to rent all of their land at a rent of R2 as they are at R2. However, at the higher rent they appear to be enjoying an unearned profit or windfall profit. In fact, that is precisely the conclusion reached by someone a continent away in a similar situation. That person was the journalist Henry George. The time and place was 19th century America and the debate was over the so-called single tax movement. At the time, America's population was expanding rapidly, as people migrated to the United States from all over the world. With this growth of the population, and the expansion of the rail roads into the American West, land rents soared, creating handsome profits for those who were lucky or far-sighted enough to buy land early. During this time, it was up to Henry George to formally the question that was on many people's minds at the time. If land is a free gift of nature, if it costs nothing to produce, and if it would be available even without rental payments, why should rent especially exorbitant rent, be unfairly paid to those who, by. Historical accident, by inheritance, or by luck happened to be landowners? Indeed, socialists like Henry George have long argued that since all land rents are unearned incomes, land should be nationalized. That is, it should be owned by the state, so that any payments for its use can be used by the government to further the well being of the entire population, rather than simply enriching a small minority of landowners. At this point it is perhaps useful to digress for a moment and discuss one of the most important concepts in both economics and the law. Namely property rights. Property rights are the rights given to people to use specific property as they see fit. And in modern societies, such rights are protected by a complex set of laws. That's why you can own your own home and the parcel it resides on. And that's why you don't have to share your home, your car, or your shoes with anyone not of your own choosing. However, we may find it interesting that in many earlier societies there was no such thing as property rights. For example, in Feudal times in Europe much of the land was held communally, that is the land belonged to everyone or at least to all the peasants in that time that used it. In the language of the times it was common land, a communally held resource. However, as the economy evolved into a market economy, the land was appropriated by individuals. These individuals, in turn, became landowners who could determine the use of land and who could receive rent for allowing the other individuals to use that land. Today, in our society, there is not only a very well-defined system of property rights and a contractual legal system to enforce these rights. There are also very complex mechanisms, such as zoning laws, that limit or modify property rights. For example, you might own a half-acre parcel of land on the coast of California. In most cases, you would be allowed to build a house on that land, but zoning laws would prohibit you from building a 30-story hotel or a toxic waste dump.
