I’ve written recently about a hypothetical town called Jubilee where the value of the land is shared equally among the residents. Economically efficient allocation of the land is ensured by auctioning long-term leases (using a “currency” that is taken out of circulation when it is paid in exchange for such a land lease) in a way that preserves incentives to improve land whose lease is about to expire.
If I’m right about all that, then the status quo — permanent land ownership — appears to be an inequitable trap. But can we get out of this trap?
First, consider a town called Stolypin, comparable to our still-hypothetical Jubilee, except that land ownership there is permanent. Suppose that Stolypin is on the verge of growth. The reason that land-owners there haven’t yet built more houses is that the cost of building another house still slightly outweighs the benefit in increased rent that they would receive.
If Jubilee has equally many houses and residents, and is otherwise equally attractive to migrants, it still has one additional attraction: a migrant to Jubilee will receive income in the form of land-use rights that they can use to bid in lease auctions, or that they can sell in exchange for goods and services. This additional attractiveness of Jubilee will push up rents in Jubilee by the value of the land-use rights allocated to residents.
Now, suppose that the cost of building another house in Jubilee is the same as in Stolypin. But the expected gain in rents that a building owner might receive is higher. So the owner of a lease in Jubilee will profit by building more accommodation. (And remember that the auction process was designed so that the builder of improvements will receive their full value, even if the long-term land lease is about to expire.)
So Jubilee will grow under circumstances when Stolypin won’t. It might grow much faster, if the value of land-use rights received by each person is quite high. As I understand things, people are usually willing to pay more to live in larger towns or cities than in smaller ones. So this growth in Jubilee’s population will further increase the value of leases.
This suggests a possible business plan for a profit-seeking entrepreneur:
Step 1: Buy a large parcel of relatively uninhabited land. This would be easier in New Zealand than in some more densely populated places.
Step 2: Set up a trust to administer the auctions of long-term land leases. Transfer ownership of the land to the trust. In return, the trust grants the entrepreneur an initial 50-year lease on one 50th of the land, a 49-year lease on another 50th, a 48-year lease on another 50th, and so on. The trust also promises to allocate land-use rights to the residents and organize the lease auctions in perpetuity.
Step 3: Build lots of accommodation, especially in the regions with the longer initial leases. Rent this accommodation to the incoming residents who are attracted by the guaranteed income of land-use rights.
In this way, a town is established, making the long-term leases that the entrepreneur holds more valuable. They paid for relatively uninhabited land, but for an average of 25 years, they can charge rent for town land. Hopefully, this increase outweighs the cost of surrendering to the trust the permanent claim of land ownership.
If this plan works, then Jubilee can be established without confiscation, coercion, or even philanthropy. If it isn’t quite profitable, then at least it shows how Jubilee might be established with less philanthropy than you might initially expect.
If the plan is profitable, then it shows that Jubilee’s system is not only “fairer” in some sense than permanent land ownership; it seems to show that Jubilee’s system is more economically efficient; a non-coercive entrepreneur profits only by making a Pareto improvement.
Where does this extra value come from? I’m not entirely sure. I suspect it may have something to do with the entrepreneur “internalizing (some of) the positive externalities” (as I think economists would say) that are associated with building houses (and thus growing a town, making it more attractive to live in, and increasing rents for all land managers).
Stolypin could internalize these externalities, too, if a single land-owner owned the whole town. But this monopoly on land ownership in Stolypin may itself discourage immigrants. The entrepreneurial founder of Jubilee, according to my plan above, has an initial monopoly on land in Jubilee, but the residents know that the monopoly is temporary, and after only one year, they can bid on their own long-term lease.