2. The Value of Location
What is there in our economic life more significant than the fact that a majority must pay the relatively few for the privilege of living and of working on those parts of the surface of the Earth which geological forces and community development have made desirable?
In order to better understand how we can transition to a more equitable and thriving society, we turn to another fundamental: Due to its inherently limited supply for each location, land obtains its value from the natural, social, and cultural wealth that exists in its surrounding environment. The convenience of being able to partake in all of the goods and services available in a particular location manifests in higher land values for that particular location. For example, people can access more goods and services on urban land than on rural land due to urban land’s locational advantage, but this locational advantage arises only as a result of the additional wealth that exists in the surrounding environment—wealth that people have created in cooperation and in competition with one another. This principle is known as the Law of Rent.[6] The Law of Rent is as universal as the law of gravity, and as central to the human experience. Just like gravity, it affects us at all times; like gravity, it can’t be seen with the naked eye, and most of us take it for granted. The real-estate maxim “Location, location, location” is grounded in the Law of Rent.[7]
MEDIA 2-1: THE LAW OF RENT
A simple explanation of the Law of Rent.
http://unitism.co/lawofrentstory
MEDIA 2-1: THE LAW OF RENT
A simple explanation of the Law of Rent.
http://unitism.co/lawofrentstory
If we look deeply at life, we realize that the benefits we receive from society are largely attributable to their location. Benefits are local to the areas that we live in: the roads we drive on, the stores we shop at, and the services we use. These benefits are convenient to us because of their proximity, and the land upon which these conveniences exist enables their existence. In fact, the more conveniences exist in a general area, the more valuable the area’s land becomes.
The Law of Rent affects everything. This concept is so basic and yet so profound that, once properly understood, it has the potential to forever change the way we view the world. The Law of Rent demonstrates that no single human being gives land and location its overall value—its rent. Land values arise from the wealth that exists in the surrounding area, wealth that we have created together and continue to create in cooperation and in competition with one another. Land values, as we shall see, are financial reflections of our interconnectedness.
The Law of Rent affects everything. This concept is so basic and yet so profound that, once properly understood, it has the potential to forever change the way we view the world. The Law of Rent demonstrates that no single human being gives land and location its overall value—its rent. Land values arise from the wealth that exists in the surrounding area, wealth that we have created together and continue to create in cooperation and in competition with one another. Land values, as we shall see, are financial reflections of our interconnectedness.
Footnotes
- David Ricardo, On the Principles of Political Economy and Taxation (1817), chap. 2. The Law of Rent was first popularized in 1817 by economist David Ricardo (1772–1823) through his work On the Principles of Political Economy and Taxation, an informative work that illuminates the mechanism by which land obtains its value. Although Ricardo focused on “the powers of the soil” as he described the added benefits that one land has over another, he laid the groundwork for a deeper understanding of the role that land plays in society. Ricardo’s Law of Rent was later enhanced by the work of Johann von Thünen (1783–1850), who developed the first serious treatment of spatial economics. He called land rent locational rent since a land’s value is dependent upon its location relative to the people, goods, and services that exist in the surrounding environment.
- Charles Duhigg and Keith Bradsher, “How the U.S. Lost Out on iPhone Work,” New York Times, January 21, 2012. A poignant example that illustrates the critical importance of location was highlighted in a New York Times article on January 21, 2012, which described why Apple Inc., the maker of sleek consumable electronics, decided to relocate its factories from the United States to China in 2005. Contrary to common belief, the cost of labor was not the driving force behind Apple’s decision. According to the article:
For Mr. Cook [Apple’s CEO], the focus on Asia “came down to two things,” said one former high-ranking Apple executive. Factories in Asia “can scale up and down faster” and “Asian supply chains have surpassed what’s in the U.S.” The result is that “we can’t compete at this point,” the executive said.
“The entire supply chain is in China now,” said another former high-ranking Apple executive. “You need a thousand rubber gaskets? That’s the factory next door. You need a million screws? That factory is a block away. You need that screw made a little bit different? It will take three hours.”
Thus, even if Apple had negotiated lower wages with its employees, production would still have been expensive because Apple’s suppliers no longer offered Apple the same speed and convenience of operating near Apple’s assembly lines in the United States. While many factors have led to the loss of America’s manufacturing base, the astronomical cost of land—a direct byproduct of the monopolization of land—should be counted as one of the most significant contributors. Location remains a critical aspect in today’s economy, yet companies’ balance sheets generally don’t account for the financial benefits that companies receive from existing in certain locations.