We Need to Talk about Land
The British people cannot afford to carry on ignoring the elephant in the room. But the road ahead will be a bumpy one. And not just because of all the pot holes…
Heaven on Earth – for the fortunate few
Over the last decade it has become increasingly clear that the problem of rent is once again one of the fundamental problems of our time. Rent – which simply means economic returns deriving from the ownership of scarce assets – was the driving force behind the development of capitalism in the 19th century, when grinding poverty and deprivation coexisted alongside extraordinary abundance and riches. After being placed in an induced coma for a few short decades in the middle of the twentieth century, the rent monster was jolted back to life in the UK in 1979 with the election of Margaret Thatcher, energised and rejuvenated in the 1980s and 1990s with the policies implemented by the Thatcher and New Labour governments, and injected with steroids after the Global Financial Crisis with the toxic concoction of austerity and quantitative easing delivered by the Coalition and Conservative governments of the 2010s.
In the post-pandemic, post-Brexit Britain of the mid 2020s, the impact of rent extraction is as destructive as it was prior to the Second World War, generating and amplifying a wide range of social problems and pathologies, from stagnant productivity, chronically low wages, and the housing affordability and cost of living crises, to rapidly deteriorating public finances and alarmingly dysfunctional public services.
Since the publication of Thomas Piketty’s Capital in the Twenty-First Century, heterodox economists have identified a broad range of types and sources of rent which have arisen or expanded mainly as a result of economic and social policies implemented from the 1980s, together with technological developments relating to the process of digitalisation and the rise of ‘platform capitalism’:
The privatisation of the bulk of the revenues generated from the extraction of North Sea oil in the 1980s and 1990s produced enormous rents for the oil companies and associated industries.
The privatisation of the utilities (particularly the water and electric power distribution networks) generated substantial rents for the shareholders of the newly privatised companies.
The shift from the 1990s toward the outsourcing of public services to private contractors has produced significant rents for the owners of the companies which have managed to win the bulk of the contracts.
The strengthening of intellectual property (IP) protections that has taken place in the UK over the past several decades has inflated the IP rents flowing to companies with the most valuable IP assets, such as large publishing companies and the pharmaceutical giants.
More recently, the development of the technology that enables the mass collection and utilisation of personal data has allowed companies in this sector to monopolise the huge revenues that flow from the network effects resulting from the creation of digital platforms.
Perhaps most significantly, the comprehensive financialisation of the housing market has generated huge financial rents for mortgage providers, private landlords, large landowning corporations, property developers, and individual owner-occupiers. The current housing affordability crisis is the flip-side of the coin of financialisation, an entirely predictable consequence of the flow of land rent to the private sector.
Britain, in short, has become a rentiers’ paradise in which those fortunate enough to own rent-bearing assets find themselves in a position to extract ever increasing amounts of rent from those who do not. Since rent extraction tends often to be a zero-sum game, with gains for the rentiers matched by losses for everyone else, it is not at all surprising that the dramatic explosion of rent extraction which has taken place over the past forty years or so has been accompanied by apparently ineluctable social and economic decline.
The Good, the Bad, and the Difficult to Determine
As cogent and plausible as this assessment of recent social and economic experience in the UK might seem to many, it is by no means the accepted explanation for the undeniable problems that have faced the country since the Global Financial Crisis. The extremely broad use of the term ‘rent’ by heterodox economists is something to which the majority of mainstream economists are likely strongly to object. What heterodox economists identify as functionless and inefficient rent is often identified by mainstream economists as legitimate profit that constitutes the reward for inherently risky innovation, investment, and entrepreneurial activity.
Those who reject the rent extraction explanation for Britain’s social and economic decline point to a host of other factors, such as the long-term effects of the process of globalisation, the abandonment of an industrial strategy, the failure of the education system, the impact of excessive taxation and regulation, and the recent misfortunes of Brexit, the Covid pandemic, and the war in Ukraine. For those more sympathetic to the rent extraction hypothesis, it is not that these additional factors have not played their part in creating the problems the UK is currently facing, but rather that their impacts have been greatly amplified and exacerbated by the post-1979 explosion of rent extraction.
A shift in tax and regulatory policy designed to reverse the privatisation and reduce the proliferation of rent would enable the country to deal more resiliently with future misfortunes, as well as generating the conditions for future growth and prosperity.
The intransigence of mainstream economists and policy-makers is undoubtedly part of the reason why barely any progress has been made in implementing the kinds of policies needed to tackle the problem of rent. But it is not the only reason. Another important reason for the lack of progress concerns the limitations of the broad conception of rent under consideration. The problem for reformers and policymakers is that rent conceived as ‘economic returns deriving from the ownership of scarce assets’ is not always functionless and inefficient, and rentier incomes cannot always be characterised as ‘extractive’, with rentiers gaining at others’ expense.
So-called ‘Schumpeterian rents’, for example, are transient rents earned by innovators and entrepreneurs during the period of time between the introduction of an innovation and its diffusion throughout the economy. Such rents, which derive from the ownership of temporarily scarce assets and result from the dynamics of competition and innovation inherent in the capitalist mode of production, reward investment and entrepreneurial activity and play an essential role in driving innovation and growth. By contrast, permanent rents derived from the ownership of assets whose scarcity is unrelated to any reward for innovation or entrepreneurial activity are economically functionless and inefficient, resulting in stagnation rather than growth.
The difficulty for the rent extraction hypothesis is that the task of distinguishing the efficient or ‘good’ forms of rent from the inefficient or ‘bad’ forms of rent is not always straightforward. Consider, for example, the case of intellectual property rents. Ostensibly, IP is protected in order to encourage creativity and innovation by securing innovators an economic return on their investments of time, labour, and resources. However, strengthening IP rights often greatly increases the profits of companies that own patents, copyrights, and trademarks without generating any more incentives for innovation. Even if a certain amount of legal protection for innovators does encourage innovation by securing a fair return for inherently risky economic activity, excessively strong and long-lasting IP protections could allow IP rights holders to earn profits which greatly exceed the level of profit that would constitute a fair return on their investments, for a far longer period of time than that necessary to incentivise innovation. To the extent that this is the case, the resulting super-profits may be regarded as extractive rents rather than a reward for innovation. In the short run, IP rights are likely to support Schumpeterian rents, but stronger and broader protections generate monopolistic profits.
The challenge of distinguishing ‘good’ from ‘bad’ rents applies to many other forms of rent, and it is clear that a great deal of further theoretical and empirical work is needed if significant progress is to be made on this problem. In the meantime, it is difficult to determine whether this or that form of rent should be socialised or supressed because it is economically inefficient and socially undesirable, or privatised and stimulated because it serves a useful economic function. For this reason, many of the policy implications of the rent extraction hypothesis are yet to be clearly determined.
Land Rent is Bad Rent – if too much of it is privatised
Does all this mean that there are no practical, currently identifiable policy implications deriving from the rent extraction hypothesis? Absolutely not! One point on which mainstream economists tend to agree – at least implicitly – with heterodox economists is that privatised land rent (economic returns deriving from the ownership of geographical space, particularly in valuable commercial and residential locations) is economically functionless and inefficient. This is because most economists acknowledge explicitly that the socialisation of land rent through the imposition of land value taxation (LVT) is itself economically efficient, generating no distortions and no social cost to consumers and producers.
The taxation of land rent is economically efficient because LVT, which is paid to the state in lieu of rent paid to private landowners, performs the same allocative function as payments of rent to private landowners. At the same time, because land is a ‘gift of nature’ that has no cost of production, taxing it does not discourage productive economic activity of any kind. Moreover, given that other forms of taxation, such as taxes on incomes, wages, capital goods, consumption, and so on, are distortionary and do discourage productive economic activity, it follows that it is the privatisation rather than the socialisation of land rent that is inefficient: no LVT means higher rates of more distortionary taxation.
Somewhat frustratingly, however, for LVT enthusiasts, calls for the introduction of LVT have tended to be somewhat lukewarm and half-hearted. One reason for hesitation might be the questionable fairness of imposing a tax on the principal (and perhaps only) assets of middle-income people who have invested a substantial proportion of their post-tax earnings in these assets. Even those who have reason to think that LVT is a fair tax can understand why many might be inclined to disagree. Connected to the question of fairness is, of course, the issue of political feasibility. Those who think that LVT is clearly unfair, and who perceive the introduction of such a tax to be contrary to their own interests, are unlikely to be persuaded to vote for politicians who are committed to introducing it.
State of emergency
Nevertheless, despite the political challenges associated with the introduction of LVT, the problem of land rent must now be addressed as a matter of the utmost urgency. The so-called ‘democratisation’ of land ownership in the UK, which took place from around the middle of the twentieth century to the end of the first decade of the twenty-first, was extremely uneven and incomplete, leaving a large and growing proportion of the population with no valuable assets and no access to social housing, excluded from most of the gains from the economic growth that has occurred over the past forty years or so. Indeed, the work of Thomas Piketty would appear to suggest that the privatisation of land rent has arguably been the single most powerful driver of economic inequality and social exclusion since the 1970s.
Perhaps more importantly, the privatisation of land rent has also arguably been the most powerful driver of the economic stagnation with which the UK has been afflicted since the global financial crisis of 2007-8. The tax and regulatory policies that have turbocharged the privatisation of land rent in the UK since the late 1970s have generated a set of economic forces and incentives that have stifled innovation and investment in the real economy, as well as artificially stimulating economic activity in London and the South East at the expense of the rest of the country.
For these reasons, future UK governments cannot afford to continue to ignore the problem of land rent.
For forty years or more, the country has been hurtling along a route set out by neoliberal economists such as F. A. Hayek, James Buchanan, and Milton Friedman. As a result, the UK tax and regulatory system as it currently exists is dangerously imbalanced, favouring mortgage providers and homeowners in the South East of England at the expense of workers and businesses across the rest of the country. The dire economic situation in which the UK now finds itself is a direct consequence of this imbalance, and urgent action is needed to change the direction of travel.
The problem of land rent, not to mention the broader problem of rent extraction, obviously cannot be solved through tax policy reform alone. The comprehensive de-rentierisation of the UK economy will require the implementation of a much broader range of measures, including major reforms of the banking system, stronger and more effective competition policy, the large-scale construction of social housing, planning policy reforms, an overhaul of the system of IP rights, and much else.
However, even if measures designed to tackle the wider problem of rent extraction could be implemented with immediate effect, these measures would be far less effective if the specific problem of land rent remains unaddressed. This is partly because of the sheer magnitude of land rent in the UK in the twenty-first century, with land accounting for over 50% of the UK’s net worth of £13.1 trillion in 2024, and bank lending dominated overwhelmingly by the provision of mortgages for real-estate purchases. It is also because if the problem of land rent remains unaddressed, then many of the benefits resulting from measures designed to tackle the wider problem of rent extraction are likely to be lost as land values rise to absorb the gains generated by higher wages and lower living costs.
In any case, most of the measures designed to tackle the wider problem of rent extraction cannot be implemented with immediate effect. For one thing, the full range of policies and reforms required for comprehensive de-rentierisation cannot be identified in advance of the research needed to distinguish functional from functionless rents. More importantly, even when it can be asserted with confidence that this or that reform should now be implemented – for example, the large-scale construction of social housing – the timescale for implementation of such reforms often turns out to be longer than one might wish. It is doubtful whether the UK has enough skilled labour or raw materials to drastically increase the supply of housing in a short space of time, whether this be through the state funded construction of social housing or privately funded house building facilitated by planning policy reform.
By contrast, a well-designed package of policies designed to begin the process of dealing with the land rent problem can be implemented almost immediately – if we can muster the necessary political will. One reason why these particular reforms are so urgently required is precisely because their implementation will facilitate the more effective implementation of other policies, such as the large-scale construction of social housing, the development of infrastructure in the regions, and so on.
By stabilising real estate prices, strengthening employment incentives, and redirecting investment to the productive economy, the right kind of tax policy reform will secure the fiscal context within which medium to longer term policies can more effectively be implemented. For these reasons, the practical relevance of the problem of land rent to UK public policy is difficult to overstate.
Please Fasten Your Seatbelts Now
But when it comes to actually implementing a land value tax, the danger of economic instability is a problem that needs to be anticipated well in advance. Although the crucial role played by land in the economy makes the economic case for introducing LVT extremely powerful, it also means that great care must be taken to avoid causing a sudden collapse in house prices. The governments of the 1980s and 90s did not care enough about the likely effects of the policies they introduced, which is precisely why the country is now in such a desperate state. Reckless decisions taken decades ago caused house prices to surge, undermining the productive economy and resulting ultimately in the catastrophe of the global financial crisis (from the effects of which we are still suffering nearly 20 years later).
Reckless decisions taken now and over the coming decade could be just as damaging. A sudden collapse in house prices would have a serious (and potentially disastrous) impact on the banks and pension funds which are heavily invested in this particular asset class. As the events precipitated by the ‘mini budget’ of the short-lived Truss administration starkly demonstrated, UK governments are always to a certain extent held in check by the financial markets and cannot afford to be careless in the implementation of tax reform policy. The proponents of policies designed to solve the land rent problem are therefore obliged to give serious consideration to the possible impact of such policies on economic stability.
At the same time, it is important to emphasise that the problem of stability is fundamentally a short-term difficulty which will resolve itself as land prices, together with the investment portfolios of financial institutions, adjust to a rebalanced tax system and regulatory framework. Indeed, given the obvious role played by collapsing land values in economic crises (including the global financial crisis of 2007-8), the longer-term effect of LVT will be stabilising, rather than destabilising. Tax policy and other regulatory reforms that keep the price of land and housing in check provide a natural braking mechanism, ensuring that house prices never reach the artificially high levels characteristic of the ‘manic’ phase of a land speculation-induced economic boom, when demand for land as a rapidly appreciating asset, fuelled by the provision of easy credit from financial institutions, drives prices ever higher, until the bubble bursts and chaos ensues. Provided that LVT is properly planned and implemented, considerations relating to economic stability therefore count in favour of this policy over the longer-term.
Progressing Towards Prosperity
Progress in the right direction is possible, but depends (among other things) on the development of creative solutions to the two key problems of politics and implementation.
Politics - Given the longstanding political sensitivity of reforms to the taxation of residential property in the UK, the task of accumulating the political capital needed to make the introduction of LVT remotely feasible will be challenging, to say the least. One thing of which we can be absolutely certain is that any serious attempt to implement the kinds of reforms that could help to solve the land rent problem will be bitterly opposed by the banks, property developers, institutional investors, and wealthy homeowners who are raking in the bulk of the land rent bonanza. This will make the political situation even more problematic.
A more open, transparent, and well-informed public debate will help to make the required reforms politically less unpalatable, but this will probably not be enough effectively to challenge the ‘tyranny of the status quo’. What is needed is a creative ‘reframing’ of both the problem (the excessive privatisation of land rent) and the proposed solution (the increased socialisation of land rent). Applying some insights from marketing theory and behavioural science might be useful here…
Implementation – The supposed difficulty of assessing the value of land has always been one of the main criticisms raised against proposals to introduce LVT. While this is undoubtedly a tricky challenge for policy designers, it is easy to overestimate the difficulties involved in the valuation process, and it is important to note the significant progress made in this area in recent years, as has been admirably documented by the fantastic Progress and Poverty Substack.
A more difficult problem (at least in the context of the UK, where owner-occupied housing has been so undertaxed at the top end for such a long time) is the need for the development of mechanisms designed to prevent a property market crash that takes down the entire financial system. Navigating the narrow course along which house prices stabilise and decline gradually over the longer-term will likely be the trickiest challenge.
We at HGF are keen to support the work that will lead to progress along both of these dimensions. If you’d like to help, or you think you might have something to contribute, then please do consider supporting, joining, or collaborating with us.
The Henry George Foundation
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