12. Land, Money, and Capital Formation

CHAPTER 12

Land, Money, and Capital Formation*

WAITING THROUGH LANDOWNERSHIP¹

What service, if any, do landowners perform for the rents they collect? Land, narrowly interpreted as sheer space and the associated pure gifts of nature, is just there, available to render services regardless of ownership and of owners’ work. Partly with such a thought in mind, Henry George proposed taxing away most pure land rent. Even some fervent defenders of private ownership of land and collection of rent give incomplete and thus feeble accounts of service performed. The landowner, according to Murray Rothbard,

finds, brings into use, and then allocates, land sites to the most value-productive bidders... . [I]t is not just the physical good that is being sold, but a whole bundle of services along with it—among which is the service of transferring ownership from seller to buyer, and doing so efficiently. Ground land does not simply exist; it must be served to the user... . The landowner earns the highest ground rents by allocating land sites to their most value-productive uses, i.e., to those uses most desired by consumers... .

The view that bringing sites into use and deciding upon their location [sic] is not really “productive” is a vestige from the old classical view that a service which does not tangibly “create” something physical is not “really” productive. Actually, this function is just as productive as any other, and a particularly vital function it is. To hamper and destroy this function would wreck the market economy. (Rothbard 1962, vol. 11: pp. 813-814; attached endnotes on vol. 11: pp. 929-930, are omitted here.)

This is Rothbard’s main explanation of what the landowner does. It is true that elsewhere (vol. n: pp. 503,509) he briefly likens rental returns on land values to interest, but he does not develop this comparison and apparently either does not see its full significance or considers its significance too obvious to need spelling out.

A fuller account recognizes that landowners, like owners of capital goods, stocks, and bonds, are performing the service of waiting, as Gustav Cassel (1903/1956) called it, insightfully interpreting it as an independent factor of production. Instead of selling their assets and spending the proceeds on consumption or other current purposes and instead of never accumulating savings in these forms in the first place, the owners are tying up wealth over time and are waiting for the future incomes and maturity or sale values that their assets will yield. So doing, they free resources otherwise allocated to consumption for construction and maintenance of machines, buildings, and other capital goods (and for formation of human capital); they thereby contribute to productivity and economic growth. Landowners are performing essentially the same service as recipients of interest in the strict sense of the term.

Arbitrage of various kinds tends to press annual net rents, expressed as percentages of land values, and interest rates on loans toward equality (subject to standard qualifications about differences in risk, maturity, liquidity, and so forth).² The uniform rate toward which these tendencies press may be seen as the reward or price of waiting in general, waiting performed in various ways by delaying consumption, tying up one’s savings in claims or assets, and so freeing resources for capital formation.

But just how does waiting through acquiring and holding land operate? Suppose that people become more thrifty and devote their thrift to buying land. Their purchases tend to raise land prices and reduce percentage yields on land and, through arbitrage, to raise asset prices and reduce percentage yields generally, including the interest rate. The decline in target yields encourages business firms to invest the freed resources in real capital formation, and the rise in real investment contributes to the general decline in rates of return. The increased investment embodies the increased thrift.

Conversely, a decline in thrift restrains real investment. If landowners, becoming less thrifty, decide to sell their holdings and spend the proceeds on consumption, net rents expressed as percentages of the depressed land values would rise. Arbitrage would communicate this rise in yields to the interest rate in the more specific sense. Investment in time-consuming production processes would suffer, as is already obvious from the reduced freeing of resources for such investments.

Waiting, then, is the social function (along with others mentioned by Rothbard) for which the landowner is “rewarded.” Saying so merely notes a parallel with the receipt of interest; it is not meant to justify the private ownership of land and receipt of land rent. Maurice Allais has even expressed some worries (examined below) about private landownership and rent collection.

INTERNATIONAL CAPITAL MOVEMENTS THROUGH INVESTMENT IN LAND

Another way in which placement of savings in land can affect the interest rate and real capital formation is instructive. Foreigners’ purchase of land in our country does so. The transaction, counted as “capital inflow,” contributes toward a balance-of-payments surplus on capital account and deficit on current account. During a period of adjustment, imports of goods and services exceed exports: our people gain the additional real resources embodied in the net imports. The foreigners perform waiting for our country by surrendering these resources currently and waiting for the yields on their newly purchased land. Furthermore, the foreign purchase tends to bid up land prices, slightly reducing percentage yields and, through arbitrage, the general interest rate as well. In this way, capital inflow through foreign purchases of land promotes domestic capital formation much the same as would capital inflow through purchase of securities. This example reinforces the analysis of domestic saving devoted to buying land.

POSSIBLE DIVERSION OF THE WILLINGNESS TO WAIT

One distinction between land and man-made capital goods holds in degree if not in essence. The supply of land given by nature in fixed quantities is highly price-inelastic, while quantities of most capital goods can respond to price. In some circumstances, then, the desire to accumulate wealth in the form of land (wealth, not mere acreage) can be met through mere growth in the market value of a fixed amount, while accumulation of wealth as capital goods ordinarily presupposes an increase at least partly in physical quantity. Maurice Allais finds this distinction important (1947, vol. 11: chap. IX and passim; passages on this and related topics reviewed below are widely scattered in his two volumes).

People’s overall willingness to wait, if it were somehow predetermined, would promote capital formation all the more if people did not have the option of waiting through ownership of land in particular. Accumulation of wealth in bid-up land values partially gratifies the overall willingness to wait, leaving less of that willingness for satisfaction in ways that ultimately result in capital formation.

Allais’s point serves a deeper understanding of capital and interest, but no policy conclusions immediately follow. It concerns how the taste for waiting is gratified. It does not contradict recognition that waiting performed through landownership makes the interest rate lower and capital construction and maintenance greater than these would be if the waiting so performed did not occur at all, not even through ownership of wealth in other forms.

It does seem plausible that waiting is more attractive and therefore more abundant overall with than without the landownership option. Allais seems to take the overall supply of waiting tacitly for granted, however, and to suppose that if thrift could not find an outlet in landownership, it would all seek an outlet in ownership of capital goods, either directly or through securities, further lowering the interest rate and promoting real capital formation.

The opportunity to accumulate wealth as privately owned land cuts two ways. On the one hand, it broadens the opportunities open to savers, thereby improving the overall attractiveness of waiting and so presumably increasing its total performance (assuming, anyway, a “normal” rather than “backbending” response to its rewards). On the other hand, the land-ownership option diverts some fraction of total waiting away from capital formation into accumulation of private wealth in the socially rather fictitious form of bid-up land values. The inelasticity of land’s supply is relevant: strengthened demand increases its quantity much less than its market value (and not merely nominal price but value relative to other things). It is not obvious whether the absolute volume of waiting devoted to capital formation is larger or smaller than it would be if the growth of land values did not accrue to private owners. Allais evidently believes that it is smaller, which is why he wants to restrain that accrual.

A loose analogy holds here with creation and destruction of trade as analyzed by the theory of customs unions. A union opens some trade among member countries that trade barriers had formerly blocked, but it also diverts to within the union some trade formerly carried on with the outside world. In the absence of specific facts, one cannot conclude which dominates—the benefits from trade creation or the damage from trade diversion. In the present context, similarly, it is not obvious which effect of private landownership prevails—the encouragement of total waiting or the diversion of some waiting into accumulation of socially fictitious wealth.

This remark about encouragement and diversion needs to be sharpened. Real resources cannot be diverted into accumulation of fictitious wealth; what can be diverted, rather, is the willingness to postpone consumption and accumulate and hold wealth. It is thus inexact in this context to worry over any diversion of saving apart and distinct from its decrease. Allais’s worry must mean that the propensity to save or wait is gratified and sopped up by accumulation of wealth that, though genuine from the private point of view, is fictitious from the point of view of society as a whole. This fictitious wealth—values created by competition to own land that would physically exist anyway—makes the economywide propensity to save slighter (as I interpret his view) than it would otherwise be. (The concepts of supply or diversion of waiting and the possible waste of willingness to supply it speak further, by the way, in favor of the view of waiting as a factor of production.)

Emphasizing the divergence of viewpoints further clarifies Allais’s point. By owning land, the individual is transferring consumption from the present to the future for himself but not for society except—and the exception is important—insofar as substitution and arbitrage promote capital-goods accumulation and the like because of waiting as such rather than because of waiting performed through landownership in particular. Through landownership, waiting can be done from the private point of view that is not waiting from the social point of view. (Waiting performed through landownership and otherwise not performed at all, however, does promote capital-goods construction through substitution and arbitrage, so that the damage done through diversion of waiting into landownership is partially and conceivably even more than fully offset.)

A reductio ad absurdum helps convey Allais’s point. If saving and real capital formation were to bring the marginal productivity of investment and the interest rate extremely low, capitalizing land rents at that rate would make land values extremely high. As landed wealth grew from the private point of view, it would deter saving through a positive effect on the propensity to consume. Thus the tentatively supposed great saving, capital accumulation, and reduction of the marginal productivity of investment and the interest rate would not go to such an extreme in the first place. An increase in wealth from the private though not from the social point of view does tend to check saving and real capital formation. That particular check would be absent if savers were denied the opportunity to acquire land.

CHANGES IN TASTES OR POLICIES

Some examples of change may reinforce the analysis. Suppose that people become more thrifty and that they initially direct their increased propensity to wait to landownership. Land rises in price, making more monetary wealth available to be accumulated as land. From the social point of view, however, this increase in opportunities for waiting is spurious. The increased propensity to wait will go partly into holding an unaugmented physical amount of land at higher prices rather than predominantly into holding an increased amount of capital goods.

Suppose that although the overall degree of thrift has not changed, wealth-owners’ preferences about the kind of wealth they hold does shift—toward land and away from capital goods and securities issued to finance them. The bid-up level of land prices increases the amount of landed wealth from the private point of view—this is a matter of arithmetic—but not from the social point of view.³ This socially fictitious wealth helps satisfy its owners’ desire for accumulated savings and thus competes with satisfying that desire through financing the construction of new real wealth with resources diverted from current consumption. This is not to say that the fictitious landed wealth reduces the willingness to save or wait as described by a schedule or function. Instead, landed wealth from the private point of view forms part of the wealth argument in the saving function. The more wealth people already hold, the weaker is their incentive to accumulate still more. The effect in question is the so-called wealth or Pigou or real-balance effect (an effect reviewed below in connection with how the existence of money also affects the interest rate, saving, and real capital formation).

Suppose a change in policy. A new tax (or, almost equivalently, some sort of new social stigma) makes landownership less attractive than before. The old rate of return on land is inadequate. Landowners try to sell their holdings and shift into securities until, at its reduced price, land bears a percentage rate of return sufficiently higher than the rate on bonds to compensate for the new disadvantages of owning it. Neither land itself nor its services have become any more or less abundant than before, and nothing obvious works unambiguously to raise or reduce the prices of its services. Still, the development that made people want to sell land and buy bonds depresses the bond interest rate and promotes real capital formation. With their prices reduced, the unchanged physical quantities of land absorb less of the overall propensity to wait or save, assumed to remain unchanged.

The following question might seem to discredit Allais’s analysis. If the overall propensity to save or wait has not increased, where do the additional resources for capital-goods construction come from? How do additional resources get released from providing current consumption? To answer, we must distinguish between the degree of thrift, in other words, the propensity to save or wait, expressible as a function of several variables, and the actual volume of saving or waiting performed. (Compare the distinction between the schedule of demand for something and the amount demanded or the distinction between the Keynesian consumption function and the actual volume of consumption.) The answer is that the reduced attractiveness of land as an outlet for the propensity to save affects the direction of that propensity at the margin in such a way fewer resources do indeed go into current consumption and more into capital formation.

Two ways of analyzing the result of the new tax or stigma attached to landownership might seem to contradict each other. On the one hand, penalizing waiting in a particular form would presumably help make aggregate waiting less attractive, scarcer, and costlier. On the other hand, the tax or stigma would reduce the land-wealth deterrent to saving and so promote satisfying the propensity to save through financing the construction of real wealth.

The difference in possible conclusions traces to differences in tacit assumptions. One strand of analysis assumes that the penalty on waiting performed through owning land deters waiting overall. It assumes relatively slight substitutability among forms of waiting: not all the waiting displaced from one particular form, land, switches to others; and the total volume goes down. Another strand, Allais’s, tacitly assumes high substitutability: the propensity to save will be satisfied in some form or other; and if satisfying it in a socially fictitious way is made less attractive, more will be satisfied through real capital formation.

This second strand of analysis tacitly supposes that land simply exists. If it can be created and destroyed, then the argument is stronger for treating it like any other capital good. If land does not, in fact, go on yielding a stream of services that remains unimpaired forever despite the conditions of ownership, then the signals and incentives transmitted by the price system can usefully guide the exploitation and conservation of depletable resources, whether or not they are straightforwardly replaceable. Restricting private ownership of resources and of incomes from them would impair these signals and incentives. Anthony Scott (1955) develops this point at length. He further argues, among other things, that nothing is sacred about conserving depletable resources in their original, nature-given form; man-made capital goods can often sensibly replace them. Because investments in resource conservation and in man-made capital goods are essentially similar, maintaining greater stocks of natural resources means having less man-made capital goods—given the total volume of investable saving.

None of the above cancels what was said near the start of this paper about how people’s willingness to acquire and hold land rather than spend the proceeds of its sale on current consumption does tend to hold down the interest rate and promote capital formation. Nor does anything cancel the reservation, largely attributable to Allais, that, given the propensity to postpone current consumption, conceived of as a function of income and wealth, the opportunity to accumulate private wealth in the form of land, as compared with its absence, does tend to absorb the propensity to wait in such a way as to impede capital formation.

Allais is not the only economist to mention land (as well as money; see a later section) in an analysis of unproductive diversion of the willingness to save; so does Maxwell J. Fry (1988, p. 17). The total market value of wealth, including the value of land and collectibles, appears with positive sign as an argument in the economy’s consumption function and with a negative sign in its saving function. Other things equal, the larger this wealth term is, the larger is the volume of consumption out of a given real income and the smaller the volume of resources released by saving for real investment. The more people satisfy their desire to hold savings by holding wealth of a privately genuine but socially spurious kind, such as the bid-up value of collectibles and land, the less they satisfy their desires for savings by holding capital goods (or securities issued to finance capital goods).

SIMILAR WORRIES ABOUT COLLECTIBLES

As just suggested, a similar worry applies to collectibles—Old Masters, antiques, rare coins and stamps, and similarly durable and nonreproducible assets. If a change in tastes or circumstances strengthens the demand for them (perhaps as hedges against ongoing inflation), the intensified bidding raises their prices. Their increased value—not merely nominal value but value relative to other goods and services—is an increase in wealth for individual holders, but it corresponds to no physical increase in wealth from the social point of view. Nevertheless, this socially fictitious wealth tends to satisfy and absorb the propensity to accumulate savings. This Old Masters wealth effect makes the volume of saving smaller than it would otherwise be, releasing fewer resources for capital-goods construction. In contrast, a strengthened desire to save and accumulate wealth in bonds tends to lower the interest rate and promote real capital formation; the increase in financial assets (and liabilities of the bond-issuers) is matched by an increased quantity of real assets.

This parable of the Old Masters is an analytical device and not a hint at a policy proposal. It reminds us, though, of one of the costs of severe inflation: disruption of financial markets and diversion of people’s propensity to save away from financing the construction of real capital equipment.

... AND ABOUT MONEY

Allais applies his argument about the sidetracking of thrift not only to land but also to money. Of course, the very existence of money influences the real fundamentals; the contrast with a barter economy is sharp. But a Pigou or wealth or real-balance effect (Patinkin 1965,1987/1992) can have the regretted consequences. Money, and especially a rise in the purchasing power of a given nominal money supply, may constitute wealth or an increase in wealth from the private if not the social point of view and so may increase the overall propensity to consume and reduce the overall propensity to save.

The real-balance effect is probably most familiar in refutation of Keynesian worries about too great a propensity to save, which in turn are probably more familiar than Allais’s quite different worry. The effect of monetary wealth on the propensity to save can in principle solve any supposed problem of unemployment and idle productive capacity due to oversaving and deficiency of effective demand. In the absence of any other solution, price and wage deflation would eventually make the real value of the nominal money supply adequate to support a full-employment volume of effective demand. (For familiar reasons, of course, this “automatic” solution is not the easiest or best one.)

More important in the present context, the real-balance effect illuminates Allais’s worry. Saving and real capital formation may be curtailed not just from a deflationary increase in the real value of a given nominal money supply but even from the availability of money as an alternative to holding capital goods and stocks and bonds. (James Tobin’s version of the argument, 1965, is better known than Allais’s.)

The reason for this worry about money is similar to the reason for worry about land. If people can postpone consumption by holding money or land or Old Masters as well as by holding man-made capital goods or securities that finance them, then part of their propensity to save or wait is diverted from channeling resources into capital-goods construction. Money is wealth from the point of view of the individual owner, and holding it contributes to satiating his overall propensity to save or wait; but it is not wealth in the same way and to the same extent for the economy at large.

The phrase “in the same way and to the same extent” is a hedge. Even from the social point of view, money is not mere fictitious wealth. It eliminates the frustrations and costs of barter. It facilitates financial intermediation and capital formation. It renders services to its holders. A larger cash balance permits less attention to synchronizing payment inflows and outflows and less use of labor and materials in managing the holder’s cash position. What renders these services is real and not merely nominal cash balances. Real money is peculiar in that its quantity is determined on the demand side. There is no way of simply supplying more real money to an economy unless holders are somehow induced to demand more of it (as they would be induced when nominal money expansion helps restore a depressed economy to full employment). (An exception is rather trivial: monetary inflation can increase the real money stock temporarily until prices have caught up.) The just-mentioned hedge applies to land as well as to money. Land is socially useful, of course, as are Old Masters. But they have a socially fictitious wealth aspect also.

Supposing a certain type of change of tastes helps us understand this divergence between private and social viewpoints. Although people remain as willing as before to postpone consumption by holding assets, they desire to hold more of their wealth as money and less in other forms. The resulting initial excess demand for cash balances (and deficient demand for goods and services) tends to deflate prices and wages. The corresponding rise in the real value of the unchanged total nominal money supply is an increase in real wealth for individual holders, but it is less fully so from the social point of view. Yet this increase in private real monetary goes toward satisfying people’s willingness to postpone consumption and accumulate wealth; it makes the propensity to consume higher and the propensity to save lower than they would otherwise be. Fewer real resources are released from providing current consumption and made available for capital-goods construction. The more of this quasi-fictitious wealth people hold, the less real wealth (including capital goods) they want to accumulate. In short, the availability of wealth in the form of cash balances diverts some of people’s propensity to wait away from the accumulation and construction of real capital goods.

Allais accordingly regrets the opportunity open to savers to accumulate their savings partly in the form of money. The problem would be worse when price-level deflation was actually rewarding the holding of money rather than physical assets (or securities financing them). Growth in the real value of money would be maintaining effective demand for current output by satiating an increased demand for real cash balances, that is, by stimulating consumption and partially neutralizing the public’s propensity to save.

Allais’s proposed remedy provides further insight into his reasoning. He suggested stamped money (as Silvio Gesell, 1934, did but for a different purpose). The tax thus imposed on cash balances would prod people to accumulate wealth in other forms, such as capital goods or securities. Almost equivalently, a policy of chronic mild price inflation would discourage money-holding and channel propensities to save and accumulate into socially more productive directions. Allais even suggested splitting apart the unit of account and medium of exchange. The “franc,” the unit of account, would be defined so as to have a stable value. The “circul,” or medium of exchange, would continuously depreciate against the stable franc, discouraging holdings of circul-denominated banknotes and deposits. Use of the circul as unit of account would be “flatly forbidden” (1947, vol. 11: pp. 579-585 and passim).

Allais focused on what he considered beneficial allocation effects of mild inflation. What amounts to a tax on real cash balances motivates people to allocate a given volume of saving less toward them and more toward real capital formation. The inflationary erosion of wealth held as cash balances further promotes saving insofar as people try to recoup this lost wealth (Mundell 1963; 1971, chap. 2). On the other hand, the loss of real-balance services would itself tend to hamper economic activity (cf. Short 1979).

As for whether the willingness to wait is used productively or is diverted, securities resemble or represent capital goods and contrast with money. Ultimately, securities can be bought only if they are issued; and, by and large, they are issued more to finance real investment than to finance consumption. If either Allais’s tax or ongoing price-level inflation prods people away from money balances and into securities, financing capital construction becomes cheaper and more attractive for companies. The resulting larger stock of capital goods, while tending to raise the productivity of complementary factors of production, tends to reduce those goods’ own marginal productivity and the marginal productivity of investment, in line with the depressed interest rate.

Despite but not contrary to Allais’s analysis, an increase in overall thriftiness, even if initially directed toward acquiring larger real money balances, does tend to promote capital formation, although less so than in the absence of the effect that worried Allais. Don Patinkin’s apparatus of CC-BB-LL curves (1965, chaps. IX-XI)is useful in showing how. Although his apparatus, unsupplemented, does not distinguish between consumer goods and capital goods, it does yield conclusions about changes in the interest rate (and price level) that in turn suggest effects on capital-goods construction. A shift of preferences away from goods—from current consumption, specifically—toward holding money tends to lower the rate of interest and thus promote capital construction, although more slightly than if the shift had been in favor of bonds. (A shift of preferences away from money holdings and in favor of bonds would also tend to lower the rate of interest and promote capital construction, as Patinkin’s apparatus also illustrates, in agreement with Allais’s analysis.) Even when oriented toward money, the willingness to postpone consumption and accumulate wealth favors capital formation, though in a lesser degree than when oriented to capital goods directly or to securities for financing them. In a sense, money itself can be a vehicle of financial intermediation, a means of conveying command over resources from savers to real investors (a role of money explained in McKinnon 1973, Shaw 1973, and Yeager 1997). This possibility hinges on the nature of the particular monetary system.

Allais’s objection to nontaxed and noninflationary money is best interpreted, then, not as denying money’s financial-intermediary function but as emphasizing that certain types of money perform that function imperfectly. Allais himself recognized that creating new money in ways that tended to favor real investment, as through bank-credit expansion for that purpose, could more or less neutralize the anti-capital-formation effect that he worried about (1947, vol. 1: chap. VIII, esp. pp. 338-340). The very issue of new money to meet a strengthened demand for money (instead of letting price deflation increase the real value of the existing nominal supply) could help convey to real investors the command over resources released by savers acquiring the new money.

This effect is a mild version of “forced saving” (cf. Hansson 1992), although the term may be inexact in the mild and noninflationary case considered here. In the prototypical case, new money loaned to investors enables them to bid resources away from other people, who are forced to consume less as inflation shrinks the purchasing powers of their incomes, money holdings, and other nominal claims. In the present mild case, new money appears merely in amounts that meet a growing demand at the existing price level (for example, a growing demand for real money balances associated with economic growth). The manner in which additional real and nominal money comes into circulation more or less corrects for the consumption-promoting divergence between the private and social views of money as wealth. An increased willingness to wait, even by way of holding money, does then promote capital construction.

This result can arise from the mere existence and not just the expansion of money that is matched on the asset sides of its issuers’ balance sheets by loans to real investors. As new investment-related loans replace old ones being paid off, even with their total amount unchanged, the money matching them continues serving as a vehicle of intermediation. The continuing opportunity to hold savings in that form promotes rather than deters waiting devoted to maintenance or replacement of capital goods. Like other instruments of intermediation, money helps hold down the spread between the effective interest rates (nominal rates plus and minus pecuniary and nonpecuniary advantages and costs) that lenders receive and that borrowers pay.

The alternative method of accommodating a strengthened demand for real money balances in a growth context works through price-level deflation. Allais’s worry does apply to that method. It applies most straightforwardly to money based on a commodity, like gold, whose production uses up real resources, to government fiat money of fixed nominal quantity, and to bank money fully backed by such gold or such fiat money. It also applies to money created to finance consumption (including government budget deficits).

In short, Allais’s worry about the pro-consumption/anti-saving influence of wealth held in real money balances is not refuted by a different consideration pulling in the opposite direction. Allais himself recognized it: existence and growth of the demand for money provide opportunities for the noninflationary creation of new money to finance investment projects.

It is not clear that the effect that concerned Allais is quantitatively important. Relative to the volumes of saving and investment and financial intermediation routinely accomplished anyway, only presumably small volumes might be frustrated by absence of suitable growth of the nominal money and of Allais’s measures to deter money-holding. Still, that effect was worth describing because of its parallel with the similar and supposedly worrisome effect of land.

A DEFECTIVE TELESCOPIC FACULTY?

As is evident from his arguments summarized above, Allais, along with some other economists, thinks that the market-determined overall rate of saving and capital formation is too low. An excessive market rate of interest reflects and implements an inadequate degree of concern for the future. A person’s choices between consumption today and consumption ten or twenty years later are made by the present person only. The future person, who might well prefer a more future-oriented allocation, has no say in the matter. The state knows better and might legitimately impose forced saving through taxation (1947, vol. I: pp. 220 n., 221-225; vol. II: pp. 592-593; similar thoughts are scattered widely through both volumes; on individuals’ “telescopic faculty” being “defective” or “perverted,” compare Pigou 1932/1950, pp. 24-26; and Scott 1955, chap. 8, “A Social Rate of Time Preference”). On all this, remember that Allais was writing back in 1947, before the accumulation of subsequent experience with government economic and budgetary policies and before the development of public choice theory.

CONCLUSION

Private ownership of land has a social function. In freeing resources from serving current consumption while waiting for land’s periodic rents and future selling price, the owner is supplying a productive service. It is essentially the same as the waiting for which lenders receive interest. On the other hand, the volumes of this service and of the resulting real capital formation would be still greater if private and social viewpoints of landed wealth did not diverge and if the Pigou or wealth effect did not deter saving. Quite similar remarks apply to some other vehicles of waiting, notably collectibles and money.

The entire foregoing discussion serves an analytical purpose only and is not meant, by itself, either to justify or to condemn the private collection of land rents. It does not claim that the effects described are quantitatively important and detectable amidst all the constantly occurring changes in economic conditions. For this and other reasons, the discussion does not recommend any particular policy. Policy proposals are mentioned to help clarify the analysis that underpins them.

REFERENCES

Allais, Maurice. Économie et Intérêt. 2 vols. Paris: Imprimerle Nationale, 1947.

Cassel, Gustav. The Nature and Necessity of Interest. 1903. New York: Augustus M. Kelley, 1956.

Fry, Maxwell J. Money, Interest, and Banking in Economic Development. Baltimore: Johns Hopkins University Press, 1988.

Gesell, Silvio. The Natural Economic Order. San Antonio, Tex.: Free Economy Publishing, 1934.

Hansson, Björn. “Forced Saving.” In The New Palgrave Dictionary of Money & Finance, edited by Peter Newman, Murray Milgate, and John Eatwell, vol. 2: 140-142. New York: Stockton Press, 1992.

McKinnon, Ronald I. Money and Capital in Economic Development. Washington, D.C.: Brookings Institution, 1973.

Mundell, Robert. “Inflation and Real Interest.” Journal of Political Economy 71 (June 1963): 280-283.

———. Monetary Theory. Pacific Palisades, Calif.: Goodyear, 1971.

Patinkin, Don. Money, Interest, and Prices. 2^nd ed. New York: Harper & Row, 1965.

———. “Real Balances.” 1987. In The New Palgrave Dictionary of Money &Finance, edited by Peter Newman, Murray Milgate, and John Eatwell, vol. 3: 295-298. New York: Stockton Press, 1992.

Pigou, A.C. The Economics of Welfare. 1932. 4^th ed. London: Macmillan, 1950.

Rothbard, Murray N. Man, Economy, and State. 2 vols. Princeton, N.J.: D. Van Nostrand, 1962.

Scott, Anthony. Natural Resources: The Economics of Conservation. Toronto: University of Toronto Press, 1955.

Shaw, Edward S. Financial Deepening in Economic Development. New York: Oxford University Press, 1973.

Short, Eugenie Dudding. “A New Look at Real Money Balances as a Variable in the Production Function.” Journal of Money, Credit, and Banking 11 (August 1979): 326-339.

Tobin, James. “Money and Economic Growth.” Econometrica 33 (October 1965): 671-684.

Yeager, Leland B. “Injection Effects and Monetary Intermediation.” In The Fluttering Veil, edited by George Selgin. Indianapolis: Liberty Fund, 1997.

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^* From Economic Policy in an Orderly Framework: Liber Amicorum for Gerrit Meijer, eds. J.G. Backhaus et al. (Münster: Lit Verlag, 2003), 455-469.

¹An omitted introduction contains complimentary remarks about Gerrit Meijer, the honoree of the Festschrift.

²But these different rates of yield are not identical just because they tend to be equal in equilibrium. Explaining this equality is part of the economist’s job, which is only impeded by making rent returns conceptually identical to the interest rate narrowly defined.

³Assets from which demand has shifted away presumably decline in price, but they are of kinds associated with capital formation.