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person pays interest, he borrows money, but the goods which he buys with the money belong to him. If he borrows money and buys property, he owns the property. If he borrows property as such, he has no claims of ownership over it. There is clearly a difference in ownership as between hiring the property at a rent, and hiring at interest the money wherewith to buy the property.

There is also a sharp difference in the method of calculating the two forms of payment. If a person borrows $100,000 from a bank, he pays, we will assume, interest at 6 per cent. With the money he may buy a factory or a piece of land. If, however, he rents a factory or piece of land valued at $100,000, he pays, we will assume, $6,000 a year as a rental. Interest is figured as a per cent, rent is figured as a lump sum per month, or year, or other period of time. In either case the price paid is for the use of the capital as a means of obtaining income. Hence interest and rent are two different methods of paying for the same sort of thing. In both cases the amount of the payment depends directly upon the prospect of income from the use of the capital.

The Valuation of Land. The value of land is derived from the net income which it yields. The price measure of land value is arrived at by capitalizing the net income of the land at a certain rate per cent. Thus, if an acre of farm land yields crops which after all expenses are met leave a net income of six dollars, the value of the land, assuming an interest rate of 6 per cent, is one hundred dollars. The value of the land does not determine its net income; the net income determines its value. This process of ascertaining land values is fundamentally no different from the process of ascertaining all capital values. In the chapter dealing with capital and interest, it was pointed out that the value of any capital good is primarily a capitalization of its earning power or net income.

In later sections, discussion will be given to the factors which, from the side both of supply and of demand, influence net income on land or other resources. For the present, it is essential to state the process of capitalizing land income into land value. This process is always closely connected with the rate of interest. If the net income on an acre of land is six dollars, and the rate of capitalization is 5 per cent, the value of the land is one hundred and twenty dollars. If the net income is six dollars, and the rate of capitalization is 7 per cent, the value of the land is eighty-five dollars. In other words, if the net income remains the same, a fall in the rate of interest will cause the value of the land to increase; and on the other hand, a rise in the rate of interest will cause the value of the land to decrease. Hence, we may state the general law that the value of the land varies directly with the net income and inversely with the rate of interest used as a basis of capitalization.

The following table shows the ratio between land value and rent for varied groups of farms. The outstanding feature of the data is the wide difference which appears in ratios of rents to values in different localities.

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* United States Department of Agriculture, Department Bulletin No. 1224, Relation of Land Income to Land Value, C. R. Chambers, p. 27.

The ratio of net rent to land value varies all the way from 2.2 per cent to 6.5 per cent. The ratio in this case is equivalent to the rate of capitalization. Land as used in this table includes both land and improvements. Rent is used in the commercial sense, as the cash rent paid by the farm tenant to the farm owner. Usually, the rate of returns represented by the above figures was less than the rate of returns on capital investments in general. The average return on land value according to this data was about 3.8 per cent. Returns on other investments of similar grades in industry were at least 1 to 2 per cent higher.

Some explanation is required of the fact that rates of return vary so widely in farm lands and of the fact that farm investment shows a lower return than other investment during this period. The explanation might be sought in changing taxes and changing costs of depreciation and repair. To some extent, these factors are important, but they are overshadowed by a much more important factor, namely, changing erpectations of future income. Capitalized value rests not merely upon actual present income, but upon anticipated future income. In times of rising prices and prosperous farming, the rosy outlook for future farm gains leads to the valuation of farm lands on the basis of these large future expectations. In the course of time, the actual yields may be more or less than the expected, but at any given period, the valuations are closely governed by the expectations, whether those are right or wrong. These variations in expected farm incomes largely account for the variations in valuation and rental ratios. Prospective farm earnings govern the situation.

The Demand for the Uses of Land.—There is no demand for land as such. Demand exists only for the uses to which land may be put in the economic process. Thus, urban land is demanded for its use as building sites. Farm land is demanded for its use in raising crops. The services and products of the land are the center of attention in analysis of land demand.

There is no single hard and fast classification of the uses of land, but the following classification suggests the types of most importance:

Building sites ....

.factories, stores, residences
pasturage, staple crops, truck farming
. railroad lines, highways, aeroplanes
. telephone, telegraph, radio
parks, streams, playgrounds
. lumbering
..extraction of raw materials for production
.navigation, pleasure, drink, power

These uses of land undergo wide changes from year to year. Much of the land is of a kind which may be devoted to several different uses, and as customs change, as population grows, as methods of production improve, new uses displace the old. What was formerly a cow-path becomes a Fifth Avenue. What was formerly a desert becomes an irrigated wheat farm. What was formerly air and space becomes a skyscraper or broadcasting station. What was formerly useless subsoil becomes a subway route. What was formerly a rocky hill becomes a recreational park. What was formerly a corn farm becomes a truck farm to feed a new grown city. The constant shifting of the uses of land means, therefore, that the demand factor is not permanent and uniform, but progressive and dynamic. To analyze demand it is necessary to analyze something that is on the move.

The Supply of the Uses of Land. The supply of land has to be viewed from two standpoints, physical supply and economic supply. The physical supply is fixed and unchangeable. The geographical structure of the earth, over current periods of time, remains constant. It is true that over long periods of time geological changes occur in the earth's surface, but for all practical purposes of economic calculation, these geological changes may be ignored. The area of the land is constant, the mineral wealth of the earth is fixed, the water surface is virtually the same from year to year.1

But supply of land must be considered from the economic standpoint, and from this standpoint the essential question becomes: What is the supply of the economic uses of land ? Economic supply is constantly changing. The supply of wheat or corn land varies greatly during relatively short periods. Acreage depends upon many factors. The rising

1 These general propositions require some qualifications. Exhaustion of coal or oil deposits alters physical supply. Forest denudation reduces physical supply. Even agricultural land may be altered in physical supply by unusual geological changes.

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or falling price of wheat, the irrigation of semi-arid soil, the drainage of swamp lands, the development of new wheat lands in Australia or Argentina,—these and many other factors cause fluctuations in the supply of wheat acreage planted in the United States. The supply of mineral resources, from the economic standpoint, is not the potential physical resources of the earth, but the mined resources, and this economic supply depends upon such factors as new technical methods of production, prices offered for the product, policies of conservation or wastage, development of new industries, costs of production, and other similar forces. Land supply for many uses is merely location. Transportation, since it creates accessibility of one location to another, determines the economic supply of land. The supply of food lands would be contracted enormously if transportation did not make possible the growth of food thousands of miles distant from the point of consumption. “Bettering transportation is more land."'? The supply of building sites in cities is affected by building higher structures and by building underground. Building space is limited horizontally, but not vertically. The supply of urban sites is therefore a supply of height as well as breadth. The economic supply of breadth of building space is, moreover, greatly changeable, since every extension of suburban electric lines, busses, and automobiles brings old land into new uses.

Economic geography and economic geology deal with the physical characteristics of land supply. These studies are of interest to the economist, but only in so far as they aid in showing how the physical supply influences the economic uses of the land. The center of attention to the economist is the economic uses, and physical supply is merely one factor bearing upon the economic supply.

The Differential Aspect of Land.—Differences in the usefulness of land have their most important causes in differences of quality and differences of location. All forms of capital show some differences in grades, but land shows these differences to a degree which, in comparison with non-land forms of capital, is extreme.

Differences in grades are conspicuous in farm lands. Soils poor in fertility yield barely enough to cover expenses of cultivation, whereas soils rich in fertility yield liberal returns over and above all expenses. In between are all grades and degrees of fertility. Those soils which, though still used for an economic purpose, nevertheless yield no net returns are marginal lands. Marginal acres may be defined as those incapable of yielding returns in excess of the expenses of production. Below these acres in fertility are many abandoned farm lands whịch could grow some products but not enough to cover expenses. These suhmarginal farms would rise to the marginal position and actually be tilled only in case the price of farm products rose to a point which would make the income on their scanty yield cover the expenses of production. Lowest of all are desert and other lands which are incapable of any use

2 H. J. Davenport, The Economics of Enterprise, p. 170.

whatsoever in the yield of crops. Sub-marginal lands are part of the physical land supply, but not part of the economic land supply.

Diverse grades of land are also found in the mining industries. Some ore beds are so poor in quality that it would cost more to mine them than the product would be worth. Other ore beds are of such quality that the costs to mine them are just barely covered by the value of the product. These are the marginal mines, because they are incapable of yielding returns in excess of the expenses of production. Above the marginal mines are ascending grades of ore beds which yield varying degrees of returns in excess of the expenses of production.

Differences in location affect land values much more than would be the case in most other forms of capital. Land is more immobile than other forms of capital. Its location is fixed and unchangeable. Machinery can be moved from place to place. Factory buildings can be erected where most needed. But acres of land stay put. City lots cannot be moved around. Since land cannot be moved, the advantages of superior locations are more important than advantages of location would be in the case of mobile capital goods. The greatest differences in location advantage appear in urban building sites. An acre of land in the Wall Street section of New York City sells at a value several thousand times as great as the value of an acre of the best Iowa farm land. A few feet difference in locations of urban sites may make a wide difference in values. Cleveland estimates indicate that a lot located at the corner of two equally good streets is worth 72 per cent more than an inside lot on either street. The organization of the average city gives rise to certain typical location advantages. The center of the city is usually the point where the leading retail stores, hotels and banks concentrate. The highest land values are found in these concentration points. Radiating from these centers are railroad terminals, wholesale districts, factory sites. Lower land values usually prevail in these outer sections. Residential sections have scales of values depending upon nearness to good streets, to retail stores, to pleasant surroundings. The outer rim of suburban homes derive their values largely from their convenience in location for commuters. At still greater distances from city centers come truck farms, wheat lands, and grazing lands.

The value of each grade of location is based upon a capitalization of the net returns that can be earned by the most profitable use of the land. High net returns can be earned by city retail stores because they are placed where the crowds go surging by. Such sites enable stores to expose their wares to the maximum number of customers. Lesser returns per square foot of land space usually can be earned in wholesale sections. The returns decline gradually for other types of situation. As net returns rise and fall, site values rise and fall accordingly. Values, net returns, rents, thus bear a close relation to each other, and reflect the

a differences in location advantages of the various sites of land.

Agricultural lands combine the differences of fertility and of location.

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