The planning system is today’s Corn Laws

What would David Ricardo think about modern housing?

Banning imports of foreign grains (such as wheat, oats and barley) – then known as corn – drives up the price of land in the home country. More marginal land is brought into cultivation, but in practice it is marginal for a reason. That means that the addition of this new land does not fully replace the imported grain and stop food prices increasing. As a result the best land, which is always cultivated, goes up in price in a pure windfall gain to its owner. 

The Corn Laws, which did just this, banning, and then taxing, the import of foreign grain into Britain, are mostly remembered for their effect on food prices and the standards of living of the average  worker, as well as for their lessons on the economics of  free trade. But at the time the question of land rents was even more important. Land, which appeared to have no substitute at all, turned out to be substitutable with foreign imports. Repealing the Corn Laws began driving down the price of all farmland.

We face a shockingly similar situation today. High house prices and rents drive up inequality. Many argue that this is a land problem: it is ‘unique and fixed in space’ and we’re not making any more of it, so it is impossible to make prices lower in high wage cities with good amenities. In fact, David Ricardo’s criticism of the Corn Laws applies identically to the UK’s housing market since the planning system. There are a huge number of potential substitutes that could be provided to existing housing, we just fail to permit them. The planning system is today’s equivalent of the Corn Laws.

The economic rents earned by factors of production that are only partly substitutable

Modern thinkers who worry about land, whether explicit followers of Henry George or not, have their roots in the ideas of David Ricardo, the nineteenth-century economist who, among other things, invented the idea of comparative advantage.

David Ricardo, 1821, Source, Wikipedia

Rent for us is usually the amount you pay someone in a given time period to borrow something from them, like their flat, their field, or their car. Rent for Ricardo, as advanced in his 1817 work On the Principles of Political Economy and Taxation, which is close to the concept now known as ‘economic rent’: the difference between the rent on land currently in cultivation, and land on the margin of being cultivated.

Producing food requires land. Some land is better than other land. If there is an increase in demand for food then more land will be cultivated, and all land will be cultivated more intensively, but because the best land is already cultivated, and because there are diminishing returns to investing more capital in any given piece of land, or getting ever more workers to work it, there will be unearned windfall benefits for existing landowners. 

This windfall is the rents, or economic rents, in question. Landowners would work this land even with lower rents, but they receive a large surplus because their land is scarce. This happens for all rare factors of production: Jude Bellingham would probably play football for a vastly lower salary than he is currently paid, but every time football becomes more popular he earns extra economic rents. Ricardo worked this through with a detailed numerical example which is in the endnote¹. 

How to solve the land problem

Ricardo feared that the trends to higher agricultural prices he observed risked enriching landowners at the expense of everyone else. Between 1730 and 1817 the English population had more than doubled, from 5.4 million to 10.9 million. As demand for food rose so did its price, helped by wars with France and the resulting continental blockade cutting off imports. 

In 1790 the price of wheat was 49 shillings per quarter. By 1817, the year Ricardo published his work, the price of wheat had risen to over 83 shillings per quarter. This meant its price had nearly  doubled from 1790 to 1817. Ricardo correctly believed that this was driving a huge windfall for landowners, who benefited even if they did not invest.

Ricardo was not enthused by a tax on unearned rents or a land value tax, believing it would not solve the problem of high prices, though it might redistribute some of the gain around. 

The determinant of a price is the cost of adding production at the margin. When this is high for a land intensive product the windfalls that accrue to landowners from this are just a symptom. In the words of Ricardo, ‘corn is not high because rent is paid, but rent is paid because corn is high’. Therefore ‘no reduction would take place in the price of corn, although landlords should forego the whole of their rent’. 

Ricardo’s solution was linked to the trade theory that he became famous for: scrapping restrictions on trade. This would reduce the price of foodstuffs in the short term by allowing cheaper imports, but also in the long run by forcing British farmers to become more productive. Higher levels of productivity would mean that more corn could be produced more cheaply, reducing its price and therefore the rent. 

Cheap grain imports to Britain were banned 1815 due to the corn laws, which initially banned the importation of grains altogether if domestic prices were under 80 shillings per quarter but was altered in 1828 to a sliding scale of tariffs that charged higher taxes on grain imports the cheaper the price was. This maintained grain prices at the high level that they had reached during the Napoleonic wars, despite the fact Britain was no longer under French blockade.

Ricardo was elected to parliament in 1819. In both his writings and his speeches to the chamber he argued for repealing these restrictions on trade. Ricardo died in 1823 but his ideas triumphed after his death. 

In 1832 parliamentary reforms increased the representation of urban areas, giving growing cities such as Manchester and Liverpool seats for the first time and standardised the franchise to enable some of the middle classes (those renting property of £10 or more per year), to vote in every constituency. In addition rural ‘rotten boroughs’ – parliamentary seats that were so small that local landowners could easily bribe the electorate to vote for them such as Old Sarum with a population of 11 voters, all absentee landowners – were abolished. Rodney Mace estimates that this reform increased the percentage of the population with an meaningful vote from one percent to seven percent.

Taking advantage of a more representative, and sympathetic political base Liberal politicians, especially John Bright and Richard Cobden launched a campaign in favor of free trade and against the ‘bread-taxing oligarchy’ of the English landed gentry. The potato blight and the resulting agricultural crisis finally convinced the Conservative government of Robert Peel to repeal the corn laws in 1846, at the cost of splitting his party. The pro–free trade Peelite Conservatives merged with the Whigs to become the Liberal party and the remnants remained as Conservatives. 

The advent of free trade was coupled with productivity improvements that reduced the price of grains. In this case it was the invention of trains which led to the ghost acres of fertile but previously inaccessible agricultural land in America coming into production. From 1846 to the mid 1860s English wheat prices converged to cheaper European level and from 1866 to 1894 wheat prices fell from an average of 56 shillings per quarter to 17s 6d in 1894. 

In both cases technology and legal reform increased the substitutability of land, proving that although it was fixed in place, it was not unique, and thereby reduced the economic rents to landowners, clawing back some of the unearned windfalls they had been enjoying. Land was substitutable – only regulation was preventing it being substituted.

Increasing the substitutability of land today

This argument also does not just apply to agricultural land, but also to modern cities. Land that could be substitutable for that under expensive homes today is prevented from doing so by regulations on development.

Over time the benefits of different cities and locations rise and fall. In particular high performing “superstar” cities have access to high paying jobs due to the inherent advantages of their location and urban agglomeration benefits. Over the past few decades the appeal of high productivity urban areas has increased. For example the median wage in San Francisco is around $100,000, In rural America, the average per capita income is half that. 

As shown most effectively by Card, Rothstein, and Yi this economic boom in urban areas has led to windfalls for local landowners (of which homeowners are the majority) and rising urban rents. An acre of land in San Francisco, which could be used for office space or apartments in which thousands of people could work and live, is of an order of magnitude more valuable than agricultural land. An acre of farmland in California will set you back around $10,000, while an acre of land in central San Francisco can run into the tens of millions. 

In part, as Ricardo knew, this is inevitable. The supply of central urban land is limited  and only partially substitutable. Of course this does not mean that nothing can be done. A developer will not spend millions on buying urban land only to erect a single tent for themselves. Like nineteenth century farmers, modern day builders can substitute capital for land and intensify the use of existing land. If living in a given city becomes more valuable we can demolish existing buildings and build taller ones. 

But even if we do build up, the cost of building up increases as the buildings get taller. It costs more to add a story onto a skyscraper than to build a similar sized single family home. As a result it becomes more expensive to build up than there are extra benefits to living in that place – or we aren’t able to build enough lifts to get people up and down in reasonable time.

Like Ricardo’s farmer we can also add land at the margin by building out, and building infrastructure to make the new suburb accessible to the city’s labour market. But this is also subjected to increasing costs the more infrastructure is used more  expensive. Prices for housing rises and urban landowners therefore get an unearned windfall whenever more people move to their city. 

A modern Ricardo however would point out that although there are hard limits on what we can do, we have certainly not reached them in cities such as London, San Francisco or New York (outside of some areas of Manhattan). In London and San Francisco rents and land values are not high because the difficulty and density of development has driven construction costs all the way up to the point it’s unprofitable to build more. Instead, the price of any house is several times the cost of building it and the majority of the value of a home comes from the permission that was granted in the past to build it

These cities are not like 1916-61 Midtown and Downtown Manhattan, where the light plane based zoning system allowed more or less all profitable development to happen. They are not like Tokyo, where liberal rules mean that density ripples steadily out from the center, and away from high value locations like train stations, or Hong Kong, where every piece of land that permits building is intensified maximally. Instead, most of the land in these cities is used for roads, gardens, and the land that is built on is largely two or three storeys. In London’s case, nearly all the suburbs in its broad economic region are those that existed in 1939, when builders downed tools.

These are in effect today’s Corn Laws. The economic windfall that is driving most of today’s inequality is not from the inherent scarcity of land, but of deliberate restrictions on how much it is allowed to produce. In many cases the cost of substituting land or capital for housing is effectively infinite due to planning laws that limit the growth of cities and the density of construction. As supply is approximately fixed any increase in housing demand simply increases house prices with no additional production even on marginal land. Improvements in productivity which reduce the cost of building up or out can’t be used to reduce housing costs, and therefore land values. 

Landowner windfalls are thus a consequence of high housing costs, rather than a cause of it. And just like in the mid-nineteenth century, the only solution is fixing the laws that cause it. Fixing the planning system is today’s equivalent of abolishing the Corn Laws. 

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1. Endnote:

By expending a fixed amount of inputs (capital and labor) on the highest quality land a landowner could obtain 100 quarters of corn (in 1800s Britain, corn was a general term that referred to all grains; a quarter was eight bushels). In 1803 the price of corn was £250 per quarter in modern prices so the income from this land would be £25,000. 

The landowner has a choice, they can invest money in cultivating the land or in an alternative investment such as shares or government bonds. The risk adjusted market interest rate is five percent. This means that the landowner will cultivate the land when the cost of doing so is £23,750 (or less), allowing them to make a profit of five percent (or more).

Let's assume that to get this high quality land to produce those 100 quarters the landowner also had to spend £23,750 on capital and labor. 

In response to a price increase landowners gear up production to the price at which the marginal cost of the production inputs is equal to price sold. This is straightforward with capital and labour. But when it comes to land there is a problem. Once all the best land has been used up it land is only partially substitutable. Landowners can either cultivate the the best land that isn’t currently being used (the ‘extensive margin’), or they can use more capital and/or labour: invest more in improving their existing land or hire more people to work it (the ‘intensive margin’).

For example if the next best land could yield 90 quarters for the same investment of £23,750 it would be economical to bring it into production at a price of £280 per quarter. If this was the case then the income for the owner of the best land from the same inputs would be £28,000. This of course meant the landowner of the first land now earns £4,250. Therefore they have obtained a windfall of £3,000 of pure profit from no extra work or investment. 

The same principle applies when increasing the inputs of the other factors. Any landowner could hire more labor or buy more equipment to increase production. But both of these inputs are subject to diminishing returns. Doubling the input of capital and labor into a farm will almost never double the output of grain. As a result of the supply curve sloping upwards like this, a rise in demand will always lead to a higher price, even if it is accommodated through more intensively working the existing land, rather than bringing extra land into cultivation.