Free Lunch as the Key to a Free Market: a Reply to Jonathan Church

“Thus, in respect to buildings and services, the landlord is selling his or her labour. Part of the rent he or she charges constitutes wages. So far so good, but what about the land component of real estate?”

A core thesis of today’s mainstream futilitarian economics is that “There is no free lunch.” It is common to neoclassical economics across the spectrum, from free market neo-liberalism to big state Keynesianism and Marxism. It is no surprise, therefore, to see Johnathan Church’s Merion West op-ed entitled “There Is No Free Lunch: Landlords Are Not Leeches.”

In fact, there is a free lunch; Mr Church was sitting on it when he wrote his article, and we should celebrate it, not hide it. Some claim that the free lunch is the key to free market prosperity—that both Labour and Capital can benefit from it together via one common mechanism. This is a win-win notion alien to the futilitarian mindset.

The free lunch is land. Land contains oil and minerals; it grows crops and provides places and materials to build our homes and cities. We are all land users; we are all participants in the land market. Land has value (it is the geography of value), and the market prices that value. The landlord, of course, is part of that market.

So are landlords “stealing” other people’s labor? Is rent, in Church’s words “an honest source of income”? This question, concerning the general nature and legal status of land rent, has a long history. Many well-known thinkers such as John Locke, Adam Smith, J. S. Mill—across fields ranging from political economy to moral philosophy—time and again have come to the same conclusion: that land is special kind of property requiring separate treatment.

Consider the product landlords sell. Real estate is not a single good; it is a composite of buildings, infrastructure (water, gas, electricity etc.), and land. The land market, in particular, is driven by its own rules, which do not apply to the capital elements of real estate. Rental real estate, as Church validly points out, is also partly a service provided by the landlord.

Thus, in respect to buildings and services, the landlord is selling his or her labour. Part of the rent he or she charges constitutes wages. 

So far so good, but what about the land component of real estate? Unlike other goods, land is not produced, and it is not derived from labour. In this respect, the landlord is charging a monthly fee for something no one worked to produce. As such, it is legitimate to ask: On what principle does the landlord exclusively claim this portion of the rent charged? Is not the land, in fact, the Commons?

“As a community we socialise our privately earned incomes (wages and salaries), while our social income, from land, is privatised.”

– Fred Harrison in Boom Bust: House Prices, Banking and the Depression of 2010 

Finally, consider land’s key feature real estate-wise: its locational value. Locational value is derived mainly from the availability of work (business activity), of markets and infrastructure, and of services of many different kinds. All of these are the products of the work and investment of a network of people, including businesses and governments (i.e. the community), both present and past. Some of it is paid for by people (e.g. tax payers) tens or hundreds of miles away.

Thus, in respect to locational value, the landlord is charging rent for other people’s work. (Caveat: A good landlord will contribute fractionally to locational value, just as a bad one may contribute to reducing it.)

Due to land’s indispensability, landlords have a unique power to legally siphon-off any and all rises in productivity expressed by wages and profits. This is why real wages do not rise—and why inequality is real. And this is why the land question is so important and should not be glossed over.

At the root of the question is a special privilege granted by the state. Landlords and other landowners as landowners enjoy tax free status. The land market is a tax haven. Its dysfunction—and the dysfunction it transmits to the rest of the economy (and beyond)—follows directly from that: speculative inflows of cash bid up the land market, make real estate unaffordable, drive up living and business costs resulting in slower growth, and push welfarism and the boom bust cycle.

The private appropriation of land rent (of nature-derived and community-created wealth) obliges the state to tax wages and profits (i.e. the productive side of the economy). This is inimical to a free market. However, this realization is not bad news. On the contrary, it comes with the realization that there really is a free lunch.

Darren Iversen is an independent student of Georgist history in England.