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Comment by chimeracoder | Hacker News Reader

> This is not a paradox, it's one of the best known axioms of economics: https://en.wikipedia.org/wiki/Law_of_rent

I wish more people understood this principle, because so many superficial economic "analyses" I see in the news completely ignore it.

By the way, you're giving the example of physical land, but the general form actually applies to property ownership of any form. (That is, the rent on any property will rise to be equal to the surplus that the renter receives from it, after accounting for transaction costs. In the long run, the property owner is always able to claim all of the surplus from the renter.)

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Landlords grow richer in their sleep, without working, risking, or economizing. The increase in the value of land, arising as it does from the efforts of an entire community, should belong to the community and not to the individual who might hold title. -- John Stuart Mill

> In the long run, the property owner is always able to claim all of the surplus from the renter.

Which to me is what's broken about land and other natural resources as private property. If the spirit and intent of a free market is to reward people for working hard, for innovation, and for solving problems, then this is the opposite. It rewards people for just sitting on their wealth. That a finite sum of money can buy you an infinite source of income is antithetical to free market principles.

> This is not a free market, BTW. Land is monopoly.

The only mitigating factor is property taxes, which as a stand-in for ground rents that geolibertarians and Georgists argue for. By the way, the latter are the more honest of the libertarians, as most other schools of libertarianism especially the popular form continually consider property taxes theft.

I wish more libertarians understood the Matthew Effect as well as they did supply and demand.

The idea that landlords have risk free income is nonsense. Ever owned rental property? You have to maintain and repair it, peridocially update it, market it, insure it, compete with other similar properties for tenants, and hope that the tenants actually pay the rent and don't damage it beyond the value of their deposit. You have to hope that your neighbor landlords and owners do the same so that overall property values in the area don't decline. And that supply of housing doesn't grow to the point that you cannot maintain your investment with the rent you are able to charge. If you can't find a new tennant when the previous one leaves, you still have to cover all your taxes, insurance, and loan payments. Yes, the supply of land in any area is limited. This is like almost any other "free market" product. The fact that land supply is finite does not in any sense mean land ownership is a monopoly. The only monopoly owner of land is the government (emminent domain).

Most of what you describe can be subcontracted to a property management company, and you can still make a healthy return.

One of the problems with the rental market in urban centres like London at the moment is that even totally inept landlords can stay in business and make a profit through capital gains alone.

If you honestly believe this premise of risk-free profits, then why not toss your life savings into a residential leasing firm?

An example stock is Equity Residential (stock EQR). Easy way to put money where mouth is.

(For the record, I don't agree with your premise and would never invest solely in real estate).

Isn't the price of stock for the residential leasing firm already high enough to reflect expected profits?

In other words, you have to pay a lot to get your share of the (somewhat) risk-free profits, and they might not be worth the cost.

For other readers (I assume you've read it or are aware of it), I really highly recommend at least skimming Progress and Poverty by Henry George [PDF: http://www.henrygeorge.org/pdfs/PandP_Drake.pdf]

It's mindblowing in its simplicity and how obvious it is in retrospect. Essentially that rent, so private land ownership, is the root cause of the persistence of poverty despite huge growth in production and capital. He goes on to make fairly strong (albeit polarizing) ethical arguments for the abolition of private land ownership and so on.

Easy to read, pretty entertaining, and eye opening.

We had a discussion on HN (https://news.ycombinator.com/item?id=10442929) about an Economist article about Georgism.

The time is ripe.

There's a German economist Silvio Gesell, who make similar suggestions. See https://www.community-exchange.org/docs/Gesell/en/neo/

The original Atlantic article mentioned Pittsburgh as one of the cities in the "sweet spot" for affordability and social mobility. Interestingly, Pennsylvania happens to be the one state that has perhaps gone the furthest in implementing George's proposed land value tax reform (at the local level, mainly). Pittsburgh used a different form of property tax that taxed land at a far higher rate than improvements until 2001, and the Pittsburgh Improvement District (I am unfamiliar with what exactly this entails) still uses a pure land value tax as a surcharge on the city property tax. [https://en.wikipedia.org/wiki/Land_value_tax_in_the_United_S...]

abolishing private land ownership has problems -- who decides how the land gets used? Ownership enables execution.

Property taxes are a way to recover some rent from the property owner, while still enabling the independent decision making that capitablism relies on for its productive success

I haven't read George's original works, but his philosophy allows for private ownership of land - it's just that the 'rent' of the land - the value derived solely from e.g. its location - will be taxed at a very high rate.

> Landlords grow richer in their sleep, without working, risking, or economizing.

Maybe in John Stuart Mill's time, but like anything in a free market, profit tends to zero (it generally doesn't hit zero, but gets closer over time). Those margins are calculated as part of time preference (see https://en.wikipedia.org/wiki/Time_preference). That's why you see some land owners purchase land and lose money while they wait for it to appreciate. Time is factored into the calculation.

> I wish more libertarians understood the Matthew Effect as well as they did supply and demand.

The Matthew Effect doesn't take into account the fact that many individuals get richer by requesting and receiving special legal privileges from state actors. Classical liberal thought rejects this i.e. equality before the law. That's why many libertarians are against the state's power to regulate, not because you can't have good regulation (the free market is far from perfect after all), rather because the power to regulate is the power to grant special favors. Politicians, like their private counterparts, are susceptible to self-interest. They need money to fund their campaigns. A consistent application of economic principles is necessary (see https://www.youtube.com/watch?v=JAbDrP7whqw).

Edit: Formatting

> some land owners purchase land and lose money while they wait for it to appreciate

It is impossible to lose money just sitting on land in the absence of property tax, which as I've stated acts as a mitigating factors, even if no one thinks of property taxes as rent paid by the land "owner" to the true owner, the commons. Worst case scenario you own land that no one wants to use, and you have zero income from it.

> the power to regulate is the power to grant special favors

And the granting of perpetual title to land for a finite sum of money and the enforcement of that title through police/military force is the epitome of state granted special favor.

We call ourselves the "party of principle," and we base property rights on the principle that everyone is entitled to the fruits of his labor. Land, however, is not the fruit of anyone's labor, and our system of land tenure is based not on labor, but on decrees of privilege issued from the state, called titles. In fact, the term "real estate" is Middle English (originally French) for "royal state." The "title" to land is the essence of the title of nobility, and the root of noble privilege.

It's not a coincidence that owners are called landlords. It's positively feudal.

Or see the Albert J Nock quote in my other reply: https://news.ycombinator.com/item?id=10534047

Rather take advantage of my poor articulation, can you soundly argue against http://geolib.com/essays/sullivan.dan/royallib.html?

> Maybe in John Stuart Mill's time, but like anything in a free market, profit tends to zero

That is true in an perfectly competitive free market, that is, where adequate substitutes are available from alternative vendors so that price competition is unavoidable.

Market freedom does mean that the there isn't a regulatory prohibition on competition, but it doesn't mean that there isn't the absence of a natural bar to competition for a particular good or service. And there certainly are natural limits to real estate alternatives in many cases, as for many uses there is a strictly limited supply of viable substitutes.

This makes real estate an area where effective monopolies (as measured through pricing power) exist, which means monopoly rents can be extracted, which means that prices are not driven to zero economic profit in the manner expected in an idealized free market.

> the property owner is always able to claim all of the surplus from the renter

Not really: this only applies if the demand curve is flat and different cities are not competition with each other.

In practice, the demand curve is not flat because there are people that earn more than others, but they will still pay depending on the wage of the marginal/equilibrium person.

Also, cities compete with each other so if e.g. Silicon Valley rents become sky-high because they capture all the value of tech companies, eventually companies will move or be started elsewhere, thus making it possible for employees to live there.

This. More precisely, and on an ultra-micro level the surplus a property owner may be able to capture all of is the surplus compared with the next best available alternative site. If it's a retail unit in a rare spot next to a busy station, the owner of the property can capture [nearly] all of the leaseholders' additional expected profit due to heavy footfall, but not nearly all their profit period, because otherwise it becomes more profitable for store owners to pass on the opportunity in favour of opening on a site with low customer footfall but even lower lease rates. Similarly, suburban houses based right outside a high-paying office campus won't be priced at much of a premium to the surrounding suburbs, because workers there will expect to own a car anyway and won't mind a slightly longer commute that much.

And all of this assumes there are multiple prospective buyers whose use of the site will generate that surplus. If the use of the site is dramatically more valuable for one prospective buyer than for all the other buyers (e.g. because they have a supplier next door), they'll still only have to bid a fraction more than a market price determined by other buyers without that advantage, and so the buyer gets to keep all that surplus.

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