respective farms. At the end of the year it is found that one farmer has produced barely enough crops to cover expenses, whereas the other has gained a generous amount of net returns. The difference is explainable only by the fact that the two farms were different in the original qualities of the soil. This difference gives rise to pure ground rent. The higher value of the one farmer's crops is due, in this assumed case, not to any virtue or ability of the owner or user of the land, for in these respects he is no better than the man who tilled the no-rent land. The high value is due solely to natural causes outside any individual's control. Since the high grade farms are scarce, and since this scarcity is within limits original and indestructible, the high grade farms, with their high net returns, command a high price for their use and a high price in the market for land.

But although this original and indestructible aspect of scarcity is important, a variable and controllable aspect is equally important. Economic scarcity of land can be increased or decreased by the creative efforts of men. One method of relieving economic scarcity is production on hitherto unused lands. During the last two decades, farming has been pushed out to the virgin soils of South America, Canada, and the Orient. Within the United States there are vast areas of unused or idle land. Some of these areas are abandoned farms which do not repay cultivation under present prices of farm products. Some are cut-over forest lands which merely need clearing to become productive. Some require drainage or irrigation. Between 1910 and 1920, the land in farms for the United States as a whole increased by 8.8 per cent. This general increase was the arithmetical sum of an actual decline in farm lands east of the Mississippi River and a sharp increase in the farm lands to the west. In urban land, the unused area is often the vertical area. One and two-story buildings frequently occupy building space suitable to ten or twenty-story buildings. In mining, potential beds of ores await exploitation. In this respect, the latent resources of China are of great importance. In water-power, great quantities of energy are now allowed to go to waste which could readily be transformed into hydro-electric power. Scarcity of land in all these respects is a flexible quantity, and with the expanding needs of growing populations, the scarcity is relieved by expansion of production to hitherto idle resources of the land.

A second method of relieving the scarcity of the land is improvement in the methods of production. Superior efficiency in the use of land has an effect upon scarcity equivalent to so much actual increase in the supply of the land. In the United States between 1900 and 1920, physical output per acre of farm lands increased nearly 25 per cent. This is equivalent, so far as scarcity of land is concerned, to an expansion of the area in farm lands of more than 200,000,000 acres. The scarcity of land was relieved to that extent. If there had been no improvement in the technique of farming during the two decades, it would have been necessary in order to produce the output attained in 1920 to have added

to the territory of the country an amount equal to more than the total land in farms east of the Mississippi River. The country practically annexed this extra land supply by virtue of the improved state of the agricultural arts. The use of fertilizers, machinery, superior breeds of plants and livestock, and better transportation facilities profoundly influences the scarcity cause of price and value of land. In the case of urban sites, the development in use of structural steel made possible the skyscraper, and the scarcity of horizontal area was relieved by the greater utilization of vertical area. The scarcity of fuel and energy is gradually finding relief in the development of hydro-electric energy, and in the distribution of electrical energy over wide commercial areas by high voltage transmission. Scarcity of transportation space is relieved by subway lines, one-way traffic on surface streets, and elevated railways over the street surface. Three layers of transportation in one block of space is equivalent to a threefold increase in the economic supply of land.

A third method of relieving economic scarcity is conservation. The most pressing problems of conservation in the United States arise in connection with the exploitation of forests and mineral resources. Land resources, from this viewpoint, may be divided into those whose products are irreplaceable and those whose products are replaceable. The fertility of the soil may be replaced by artificial fertilizers and crop rotation, but the oil, and coal, and iron, when once exhausted, can never be replaced. Water-power is continually and immediately being replaced, but forests can be replaced only by carefully planned reforestation extending over a relatively long period of time. Conservation of all irreplaceable resources of the land is especially urgent as a means of controlling the scarcity of the basic materials of modern existence.

Finally, it remains to be pointed out that since scarcity exists purely relative to demand, the fundamental changes in habits of consumption, by affecting demand, affect also the relative economic scarcity of the land. The demand for automobiles governs in large measure the economic scarcity of petroleum. Where national custom calls for a diet of rice or of rye bread, the economic scarcity of wheat land is relieved. People are getting accustomed to ten and twenty-story apartment houses as a means of overcoming the economic scarcity of urban residential sites. The scarcity of land is regulated in great measure by the new social standards and customs which people acquire and the old social standards and customs which they discard.

Although the economic scarcity of land is influenced in these ways, nevertheless the process of adjusting scarcity of supply to price changes and to demand is not by any means quick and prompt. The slowness of increasing or decreasing the economic supply of land is a marked characteristic of this factor in production. Manufacturers can regulate promptly their volume of output, but farmers require at least a whole season, and usually more, to shift from one crop to another, or to restrict or augment the total volume of production. This slownesss of making

adjustment between the pricing factors is an important land problem, and further discussion is devoted to it in the following chapter.

Land Returns and Cost of Production.—It was part of the doctrine of Ricardo that rent on land is not a cost of production, and does not enter into the price of the product of the land. Ricardo said, "Corn is not high because a rent is paid, but a rent is paid because corn is high. That corn which is produced by the greatest quantity of labor is the regulator of the price of corn and rent does not and cannot enter in the least degree as a component part of its price." Although this extreme doctrine is sound enough in the sense that the tenant cannot pass on to the consumer the high sum of his rent in the form of a higher price for corn or wheat, nevertheless it ignores one most important feature of the pricing process.

This feature is the scarcity principle. The price of corn is high or low, not directly because of the cost of growing it, but because of the scarcity or plenty of the supply grown. Neither rent nor cost enters into the price of the products of the land except as they affect the scarcity of those products. If land returns are high, people will be encouraged to expand production, with the result that scarcity will be relieved, more corn and wheat will be grown, and prices will fall. If land returns are low, people will be encouraged to contract production, with the result that scarcity will be intensified, less corn and wheat will be grown, and prices will rise. Thus, scarcity is much influenced by costs of production, by land returns, by rents. The only way in which any of these factors can influence the price of the products of the soil is by first. affecting the scarcity of these products. It is the scarcity of the product which determines price. Only as cost affects scarcity can it affect the price of the products of the land.

To understand the relation between cost and scarcity, it is necessary to study the distinction between the marginal farm and the farm above the margin. A farm earns more than marginal returns, not by charging a higher price for its products than the price to the marginal farm, but by producing at a lower cost. High earnings are due not to profiteering but to economy. The better farms have lower costs but sell at the same price per bushel. If it costs one farmer two dollars to raise a bushel of wheat and another farmer one dollar, the market price of wheat cannot be less than two dollars. If it were less, the first farmer would be driven out of business, and a shortage of the supply of wheat would ensue. The second farmer could afford to sell at much less than two dollars per bushel, but he does not have to do so because the market price is set by the marginal or high cost farmer. The more efficient and the more prosperous farmers produce at a lower cost per bushel, but they get the same price per bushel as the marginal farmers. Consequently, we may say that the economy of low-cost production is not a factor in the price of the product of the land. Instead of using the Ricardian formula that rent is no part of cost or of price, we may use the formula that economy is not a cause of high price. The price of wheat is fixed not

by what low-cost farmers can afford to take for their crop, but by what high-cost farmers must receive if they are to be kept in the business of wheat farming.

Directly, therefore, the economy of the low-cost farmer is not a determinant of price. However, there is more to the pricing process than this direct connection between marginal costs and price. Indirectly, the economy and consequent prosperity of the low-cost farmer will affect the scarcity of the product. And a change of scarcity will cause a change in price. This effect of low-cost production by the prosperous farmer upon scarcity may be illustrated by the case of wheat farming. When it becomes apparent that wheat farmers are waxing prosperous because so many of them are producing at low costs but selling at the prices necessary to sustain the marginal farmer, there arises the tendency for more people to engage in wheat farming. Prosperity in wheat farming lures them into the business. They obtain wheat land by draining swamps, irrigating the semi-arid regions, and shifting land from grazing or corn growing to wheat growing. They use more and more labor and capital on each acre of land. In other words they push out farther and farther towards the intensive and extensive margins of wheat cultivation. But while this process of wheat expansion is going on, the crop increases, and larger supply is put on the market. Scarcity of wheat is affected, and the force which originally set in motion the causes affecting scarcity was the prosperity of the low-cost farmer. It should be obvious that the prosperous income of the low-cost farmer does not tend to enhance the price of wheat but to lower it. Prosperity leads to greater production of wheat, and this lessened scarcity lowers the price of wheat. Just as soon as prosperity due to low-cost farming leads to over-production of wheat, price slumps. After price slump has driven the poorest farmers out of wheat growing, under-production of wheat results, and price rises. Under-production and over-production are affected by the size of land returns. They are phases of the basic problem of scarcity, and illustrate the general principle that either rent or cost affects price only in so far as they first cause some alteration in the scarcity of the product.

Value Appreciation and Unearned Increment.-Many fortunes have been made by buying up tracts of land which in the course of time have come to be favorite building sites in large cities. The high value of city real estate is due to the growth of city populations and to general social progress. Agricultural land appreciates in value in the same manner, although not to the same extreme degree. The free lands disbursed under the Homestead Acts have come to possess a substantial market value due to their development by farm cultivation and to the demand for their products due to expansion of markets and growth of population. Appreciation in value is a primary objective of the buyer of land. He is often willing to sacrifice a high rate of present returns on his investment for the sake of reaping a large ultimate harvest in the form of a sharp increment in the value of the investment.

The amount of appreciation in value is a direct reflection of increases in the net income that can be derived from the use of the land. It will be remembered that the value of land is fundamentally a capitalization of the net income which the land will yield. When social changes and industrial growth enable certain pieces of land to yield higher net returns, the capitalized values of these areas rise accordingly. Hence appreciation in land value is directly due to the increment in land returns.

This increment in land returns is often called an unearned increment. It is referred to in this way because the cause of the rise in value is said not to be any productive effort on the part of the individual owner but the growth of population and the general social changes over which the individual owner of land has limited if any control. The progress of society, it is said, produced the increment of net income and of value, but the benefit of this increment redounds to the gain of the individual owner of the realty. Where this extreme analysis of unearned increment is assumed, there follows the conclusion that since society produced it, society should take it. The method of taking it is by taxation. Carried to its logical conclusion, this proposal leads to the doctrine of the single tax advocates that a drastic tax should be levied on the unearned increment of land in order that the entire increment should be made to revert to society. The criticism of this proposal may be left to the chapters on taxation, but at this point it is necessary to understand the connection between problems of land taxation and of increments in value and rents.

It is doubtless an exaggeration of facts to assume that all of the increment of value and rent is unearned. The owner of the land usually is active in developing the uses of the land, and if his service is rendered in ways which result in the right location of buildings and parks for public use, the resulting increment in value of land is in large measure a result of forethought and planning. The dividing line between increment which is earned and increment which is unearned has to be separately determined for each individual case, but it is important to recognize that the function of the real estate dealer and owner is not an unproductive one. The increment of value is due in substantial measure to risks and services which are of indispensable value to society, and the appreciation of land value and the increment of land income are to that degree a legitimate and necessary reward for economic services rendered.

The criticism of land income often leads to the assertion that all rent on land is unearned. This assertion is limited more especially to that form of land returns which has previously been defined as pure ground rent. The income which is attributable to the original and indestructible physical scarcity of the land is not created at all by the hand of man, so the argument runs. This scarcity is determined purely by the free and unaided gifts of nature. Man did not produce it and man cannot destroy it. Consequently man cannot earn the income attributable to the natural physical conditions. The single taxers extend their doctrine,