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Wednesday, December 22, 2004

This Land is Joe's Land

Watching the real estate market over the last few years has caused me to ponder the economics of limited-resources in general, and the picture that emerges is a bit disturbing to say the least.

Investing one's thoughts, efforts, and capital into constructive endeavors creates wealth--real things (including knowledge and such) come into existence that wouldn't have otherwise, and often these things can be further leveraged to creating more wealth, and so on.

The real estate market, and perhaps any market of limited commodities, is a whole 'nuther beast. Of course, it's not the houses or buildings, it's the land. Building a house to live in is a fine example of constructive investing. But houses don't appreciate--they depreciate, like most any other constructive investment. It's the land that appreciates, generally far more than making up for the depreciation of the home itself. This is kind of odd when you think about it because it means there is a profit to be made from nothing gained or created, and equally odd even if the prices were to level off henceforth, since even today a massive sum is paid for a postage stamp of livable land, and just where is that money going?

Sadly, it is going to people who either directly, or indirectly through inheritance, happened to own the land in the past while it was appreciating, or to bankers, lawyers, real estate agents, and tax collectors who have shaved off their bits along the way. Notably, exactly zero of the money you pay for a bit of land (or for the mortgage on a loan for a bit of land) is for someone's constructive efforts. Even if you credit the past owners with the foresight to invest in that particular land when they did (though I suspect few could be properly credited with more than mere luck here), that was not an investment in a means of productivity in the usual sense--when you buy a tool to make you more productive, it is your resulting product that is the new wealth, while the tool itself depreciates if anything. With land, it's just a matter of sitting and waiting (and if you happen to use it productively in the meantime, so much the better, but that's a separate matter).

Land is worth whatever the market will bear, and as a limited resource, this is often near the threshold of what people can possibly afford. The housing market in particular is like a game of musical chairs where whoever loses this round ends up in a homeless shelter, or back with their parents, or giving up an extra hour of every day to driving--people will pay whatever they have to, and since they're competing against each other this means they're going to pay as much as they can.

But the sellers in this market aren't producers--they're just people who happened to own the land, any time in the past, from a time of less scarcity to a time of greater scarcity. Let's call those people collectively "Joe". Even if you buy the land completely on a loan from someone who bought the land for no less themselves, the interest you are paying is ultimately for the money in Joe's pocket. And if you follow the history all the way back, Joe got the land for free, and used it for his own purposes just like you're using it now. Except you're also paying half of your income to Joe. And Joe is probably just buying beer with that money, because being an average of many people, that's mostly what Joe does. And what little is left over for Joe to invest, he's ultimately loaning to you, which just goes to show there's no real value here, just a juggling of books that leaves you obligated to pay Joe interest every month for something he got for free. Of course, since Joe is really many people, and since the full loop and history span many transactions, Joe's sharing your pie with many a banker, lawyer, and real estate agent. But I doubt that makes you feel much better.

So, think about this: your office is probably located in some business district, with the rent on that land coming out of your paycheck. You take that check to the corner market and buy some food, paying your share of rent for that corner, and for the land on which the food was grown, and then finally you arrive home, which probably consumes much of the remainder of your paycheck. To be sure, you are paying for actual work and effort and productivity along the way, too, but a sizable percentage is going just to pay for the land--which in turn is just going to buy Joe (and his lawyers, bankers, and agents) a whole lot of beer. Every day. Forever.

This all seems rather suboptimal to me, but for the life of me I can't think of a "solution". It's a quirk of the free market when pitted against limited resources. On one hand it makes sense that whoever is willing to pay the most for it should get it; but on the other, what exactly are they paying for, day after day, and why to Joe?

In effect, the system is being kept in balance purely through parasitic drag. And year after year as technology, infrastructure, and efficiency progress, we just keep adding more drag until it balances out again. And sadly, this seems the best solution, as any other I've heard simply fails to find balance at all (or merely implements the same process in a less straightforward manner).

Perhaps the most distressing thing about this whole boondoggle is that Joe, and his lawyer and bankers and agents, in their infinite parasitic genius, have managed to shoe-horn the domain of ideas into the same wedge-- thanks to the contrived delineation of "intellectual property" which has re-created this dilemma of limited resources in a whole new domain by brutally strangling the horn of plenty. Unlike the land situation, the answer to this created problem seems more obvious.

But alas, when it comes to marketing and lobbying, Joe is way ahead of me.

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Simon Funk / simonfunk@gmail.com