A Guest post by Phil Hayward introduces his weltanschauung or worldview for how cities work.

Henry George -1839–1897 was concerned about economic rent. Foundations promoting his work still exist. Their definition of economic rent can be found here.

There is a big issue that affects transport planning just as much as gravity affects rocket science, and if you can imagine rocket science without gravity, this is exactly what transport planning is like and why it is such a failure.

This relates to “economic rent” in land: in layman’s terms, “land prices and how they incorporate the advantages of location”. Everyone seems to understand that urban land is worth more than rural land, and many people seem to “understand why” in that they talk about trying to recreate the highest-value locations, such as Manhattan. The problem with “trying to re-create” this, is that you can’t work backwards from the “form” to create the high incomes that are actually the result of a particular industry type being located there, not a result of the “form”.

It is “land economics 101” that income levels are linked to land prices: the more that local people can pay for space, the higher the price will be. This insight is what led to Marxism and Georgism, because it seems unjust that a large share of “income growth” is captured by landowners who “do nothing”, in contrast with entrepreneurs and labour.

However, a systemic change in the nature of land rent, and a series of massive insights into this that were developed and accepted from circa 1900 to 1950, have unfortunately been forgotten. This is when transport became flexible and rapid enough to enable access to sufficiently abundant quantities of land, the magnitude of “economic rent” diminished. Between the time that Karl Marx and Henry George were obsessing about the injustice of this, and the 1950’s, the REAL (income related) price of urban land in US cities fell by several orders of magnitude, with other “first world” countries following the trend.

This is because roads and automobiles exponentially increased the amount of low value (rural) land that could be developed, and this destroyed the ability of the privileged incumbent landowners / landlords in the pre-automobile city to “gouge”. “Economic rent” changed in its nature from “monopolistic” to “differential”, if you want the technical terms. “Differential” means that the prices are derived from the CHEAPEST land available, plus a premium for agglomeration efficiencies (via incomes) and for amenity.

This effect was non-controversial and appreciated -it resulted in mass democratisation of the ownership of decent homes, and was referred to approvingly by the social reformer Charles Booth; the architect Frank Lloyd Wright; numerous planners like Howard, Geddes and Unwin; and numerous economists like Alfred Marshall, Robert Murray Haig, Homer Hoyt, Robert Ratcliffe, Lowden Wingo and William Alonso.

Public transport never had this effect because it only adds to urban land supply in small volumes -the land added is in “ribbons” and its effectiveness diminishes rapidly relative to distance from the city.

But a disruptor of this beneficial effect has been introduced in the form of urban growth boundaries (and there are other proxies for these that have the same effect). What the economics and planning professions are missing today, just as seriously as rocket scientists forgetting about gravity, is that cities economic land rent -i.e. land prices relative to incomes -have suddenly inflated 30-fold within a single property cycle after decades of stability -and worse. In UK cities planned rationing of land for urban growth was introduced in 1947, the inflation has been perennial, to the extent that the inflation is now in the range of 100-fold to 900-fold. This is the return of the “monopolistic” land rent that so outraged Marx and others. It represents a “gouge” of “the maximum that people can be forced to pay” for space, just as the price of food could be grossly inflated if it too was rationed.

The above is the urban land rent big picture; but at the level of “individual locations within the urban economy”, if public transport provision is “valuable” then the local property prices reflect this, just as they reflect any amenity (the quality of local schools is a biggie). Unfortunately this has the effect of “pricing out” the great majority of people who would “like” the location; this is a harsh economic inevitability.

The best working solution to this, anywhere in the world, can be found in Japan. From the early 1900’s, urban area growth was based on a highly competitive, cut-throat process where multiple private enterprises developed both commuter rail and subway systems, AND the property served by their own system. They adopted the commercial tactic of attracting tenants by trying to be CHEAPER and better-value than their numerous competitors, including negotiating with “trip attractor” commercial tenants. These numerous integrated transit-and-property enterprises still exist and still compete with each other in the same way! Nevertheless, there still came a time in urban evolution where car travel surpassed transit as the dominant mode in Japan.

Other examples of integrated transit and property enterprises such as Hong Kong’s, tend to be a single monopoly which relentlessly price-gouges (i.e. extracts monopolistic economic rent) on their property without regard to having to “attract” anyone. This is why Hong Kong can be the densest developed city AND have the highest housing costs.

See my point: transport planners who don’t understand these realities are like rocket scientists who don’t know about gravity, and therefore make all sorts of wild claims about what magnificent outcomes lie ahead, from their plans and proposals.

Editor's note:

I understand and to a certain extent share Phil’s frustration about the lack of understanding re the dangers of restrictive urban land supply (the restrictions that make it hard to build a city up or out) but there has been greater recognition in recent years from academia about this issue. Here, for example is two articles I found in the last week or so.