... THEIR CAUSES AND CURE

Many people think that all industrialised countries must suffer from a periodic rise and fall in economic activity. The side effects of these ups and downs in business activity are grievous in both phases. During the boom, businesses are tempted into excessive expansion and borrowing; during the slump enterprises collapse. There is a spiral in unemployment which hurts millions of employees and brings misery to tens of thousands of entrepreneurs who are pushed to the brink and often suffer ruin. A great many other people suffer as well.

This periodic distress is not necessary. The boom-slump cycles can be greatly reduced, and perhaps avoided altogether, by fiscal reform.

Understanding the causes.

Land speculation is the root of the problem.

The word "land" is used here in the sense in which it was used by the classical economists to mean all natural resources. It means the ground on which everything stands, whether in town or country; the source from which all minerals are extracted, the soil in which everything grows. It does not include anything which is the work of man: buildings, roads, machinery, growing crops, drainage ditches and so on.

Some types of speculation are good for the economy. When business people make speculative investments in new ideas and technological developments they ensure that progress and improvements take place in society. However, when people speculate in land, the results are bad for society and produce booms and slumps.

How the economic cycle works.

At the bottom of the slump, there is widespread unemployment, and land prices are relatively low. Some people nevertheless buy land at the low prevailing prices, and other people continue to make discoveries and inventions which are the mainspring of future wealth production.

Gradually and painfully, the economy begins to improve. As order-books pick up, more jobs are created. People who had once been unemployed and living on the dole now receive wages. Their demand for goods increases and further jobs are created to satisfy that demand. The government's outlay on the dole is also reduced and the money is put to other uses.

At this point, the demand for land rises. People need land on which to extend factories and open shops, and for new and better homes which their improved circumstances make possible.

But now a very important difficulty begins to appear. What used to be called ''the law of supply and demand" works in a totally different way with land from the way in which it works for everything else. When the demand for cabbages or cars or computers rises, people make more of these things in order to satisfy the rising demand. When the demand for land rises, there is no way of increasing the quantity to satisfy the new demand, As Mark Twain said long ago, "They ain't making it no more!"

So land acquires a scarcity value. People who have got land already are able to raise the price. Not only that, but they anticipate further rises in a year or two, and so they hold it out of use, waiting for the price to rise still more. This rising demand actually reduces the quantity of land available at an affordable price.

All kinds of distortions now appear in the economy. More and more people begin to base their lives on the assumption that land prices will continue to rise. Building firms compete with each other to buy land, not for current use but to hold in "land banks" on which they hope to draw at some later date.

Ordinary householders who look in the windows of estate agents and see property like their own rising rapidly in value, begin to feel rich. In the boom of the late 1980s, some people saw the value of their "house" rise more in a year than the total salary they had received that year.

But what had risen so much in values? Not the bricks, timber and glass of which their house was made, but the land on which it stood.

And so, in these boom conditions, people begin to buy expensive consumer goods which the would not normally purchase. More goods are produced to meet the new demand. All this pushes the boom further. People become less and less disposed to save and invest. Why should they save, when rising land prices are doing the saving for them?

As more people become eager to invest in land, interest rates get pushed up. The entrepreneur who is willing to speculate usefully on technical developments is caught in the pincer between high land rents and expensive capital.

The victims.

In the end, of course, the bubble bursts. The boom collapses, People no longer feel rich. For the really unlucky businesses and people, there are high debts to be repaid and seriously reduced income to do it with, their demand for goods dries up and so the people who were once making those goods become unemployed. Businesses fail, People are lumbered with land which they had purchased at a high price, but which they can no longer use.

In the boom-slump cycle of the 1980s and early 1990s, this course of events did not just affect the simple and gullible, it affected experts as well. The phenomenon of "negative equity" brings this point out clearly. At the height of the boom of the 1980s, not only were ordinary house buyers prepared to take on huge loans, but building societies were prepared to advance those loans. In the end, building societies and householders alike were caught. Householders lost their savings, building societies found that they could not recover the money they had advanced if they decided to foreclose on bad debts.

Estate agents burnt their fingers as well. Many people will remember the great number of offices which were opened in every High Street in the 1980s and how a lot of those were forced to close when the boom ended. Shopkeepers and other businesses were caught in the trap. Even some big companies were caught.

That was what happened ion the most recent boom-slump cycle, but something . essentially similar has marked other such cycles in the past. Unless people understand the lesson, the story will be repeated in the future.

The solution.

It is necessary to recall the fundamental difference between the economic behaviour of land and the economic behaviour of other goods. The difference turns, as we have seen, on the fact that the quantity of land is fixed, while the quantity of most other goods can be increased at will.

That fundamental difference ought to be reflected in our taxation system. Most of our taxes today fall on people performing useful activities. Income tax falls on people who work. VAT falls on people who buy goods and services. Such taxes necessarily distort, and usually discourage these useful activities and inhibit production. They also lead to ingenuity in avoiding or evading the tax burden.

What is needed is a different kind of tax, which should largely replace existing taxation. This is a tax on land values - remembering that the word "land" means the site alone and excludes the value of all improvements which the owner or his predecessors have introduced on that land. It would apply to all land everywhere, urban or rural, vacant or in use.

How would this relate to the boom-slump cycle? As has been seen, the first sign of an approaching boom is useful economic activity; but the second sign is rising land values. With Land Value Taxation (LVT), the increased land values would be collected automatically in tax. Without the prospect of gaining from the increase in the value of land, speculation in land would become pointless. But speculative investment in ideas and progress would remain. Indeed, it would be increased, because people and institutions with money would have to invest in this socially useful way. LVT would mean that nobody would have an inducement to hold land out of use, or to speculate on rising land values. Why hold land out of use when you are merely holding on to a tax liability?

So land would become much more freely available for use, and there would be no point in investing in speculative rises in land values, for those rises would be automatically mopped up in taxation. The artificial surge of booms would be replaced by steady growth. The crash in land speculation which produces slumps would disappear. Britain would enjoy a stable, full employment, economy.