Western world will become significantly less wealthy

Wednesday, 01 October 2008 06:06

Western world will become significantly less wealthy - so says the Daily Telegraph economics editor in this article. This is true. But it has not happened yet. Billions dollars and pounds have been lost in paper values, but that is not a loss in wealth.

The loss in wealth will occur because land prices had advanced well beyond the actual earning capacity of land, based on the capitalisation of the rent at a realistic rate. But because the price of land is sticky downwards and does not fall to market-clearing levels, the wealth creation process, which depends on the application of labour to land, will be throttled. That will make people less wealthy. Millions will be out of work for several years. Productive capacity will stand idle. It does not have to be like that. If land value taxation were in place, it would act as a holding cost. Unwanted land would be promptly brought onto the market and recycled for new uses, with a quick recovery.

Underlying the present difficulties is the mistaken notion that land is wealth. It is not. A land title is a claim on the stream of income known as Rent. How the Rent of Land arises was explained by David Ricardo when he formulated his Law of Rent. Pity everyone seems to have forgotten about it. For a simple and amusing explanation, look here.

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