26 Jul 2014

Distinguishing “Land” from “Capital Goods”

Austrian School, Shameless Self-Promotion 11 Comments

I answer Gene Callahan’s interesting question. An excerpt:

For a fanciful example, if Superman went and got an asteroid full of precious metals and brought it to the surface of the Earth, and then died in a sneak attack from Lex Luthor, the pile of metals would have the same economic status as a gold mine newly discovered by prospectors. The fact that a (super) man had moved the asteroid wouldn’t make it a capital good. But, if Superman were still alive and capable of repeating the operation on additional asteroids, then the asteroid brought to Earth would be a capital good.

11 Responses to “Distinguishing “Land” from “Capital Goods””

  1. Transformer says:

    While the answer you give makes sense it does leave a lot of grey areas.

    The difference seems to be as follows: At any point in time there will be in existence a set of rent-earning things. These things can be divided into “reproducible” things like tractors which will be classified as capital goods and “non-reproducible” things like arable-land which will be classified as land. The difference being that if capital-goods are earning above-average profits then their production will be expanded until these profits are eliminated, while land can continue earning above-average profits for ever potentially because its supply is limited.

    The problem I find with this is that its very difficult to think of things that are truly non-reproducible. If arable-land is generating huge profits isn’t it possible (with modern farming techniques) to convert less arable land to be more arable ? Does this land then become a hybrid capital/land good, or what ?

    The idea of tracing back all profits to original factor is good in theory, just hard to work out what it means in real world scenarios.

    • guest says:

      If arable-land is generating huge profits isn’t it possible (with modern farming techniques) to convert less arable land to be more arable ?

      Not only that, but the desire to pursue that strategy can make non-arable land more valuable than arable land, if the former contains the materials to make the latter possible.

      And then what if hydroponics techniques improve such that you need even less arable land to grow food?

      My understanding is that land is only a capital good when it’s used in the production of lower-order goods.

      If you’re playing football on it, for your own enjoyment, then it’s a consumer good.

    • Tel says:

      The difference being that if capital-goods are earning above-average profits then their production will be expanded until these profits are eliminated, while land can continue earning above-average profits for ever potentially because its supply is limited.

      It isn’t quite as simple as that. In Australia we diverted the course of several major rivers to create the murray murrumbidgee irrigation area. Of course we never created new land, but anyhow Australia is in no way short of land. What was created was farmland, out of non-farmable land.

      Some say we could do it again, like I said there’s no shortage of land, no shortage of rainfall either if you know where (and when) to go looking. We do have to overcome some reluctance from the Green movement who prefer Australia in her traditional Red-Brown colouration.

  2. Major.Freedom says:

    I don’t think the reproducibility versus nonreproducibility criterion is the best one either.

    For is it not possible for a transportable means of production to be produced by man, sold by man, which might suggest it being a capital good, but still be non-reproducible? For example, go back to the asteroid. Imagine instead a wealthy entrepreneur believed he could make a profit by financing an expedition to an asteroid that will pass nearby the Earth soon and will not pass nearby for another 100000 years, to bring back expected elements such as precious metals. To cover off any corners, suppose that not even directing the entire population of Earth’s capital can make an expendition to the asteroid worthwhile once that window of opportunity is gone and the asteroid again orbits away far into deep space. For all intents and purposes, this is a one shot deal in anyone’s lifetime.

    Suppose the expendition was successful, and has a surprise. The explorers, who were paid with wages, and will partially be paid with a certain cut of any pre-variable profit upon selling any materials, bring back a billion tons of ore filled with elements that do not even exist on our periodic table, but are nevertheless stable. Scientists believe this asteroid is a remnant of a planet from an advanced civilization who produced these rare elements in super advanced particle accelerators.

    As the ore is sold to more and more buyers, who find more and more new, profitable uses for it, the question I ask is what kind of income are the entrepreneur and workers earning, given the ore is non-reproducible, but transportable, and was produced and earnsprofit for the owners?

    And also, what if Earth scientists discover a way to produce the elements found in the asteroid but in a laboratory? Would that suddenly change the kind of income our entrepreneur is earning?

    ——————–

    From a subjective marginal utility perspective, every income type is equivalent in that they are all gains sought by incurring costs. Psychic gains, material gains, are explainable using basic economic concepts. In the interests of proposing a semantic, why not identify land and capital not as what is non-reproducible and reproducible, but rather, distinguish them in terms of spatial predicates, identified by the subject, the owner?

    For example, the Earth’s surface is to me “land”, because the Earth’s surface serves as my frame of spatial reference. Goods that are produced are capital goods if they are goods whereby my spatial frame of reference is “outside” the good in question, namely the Earth’s surface. Land is the value I attach to that spatial frame of reference. Land is scarce, the Earth’s surface is scarce, because it is a rivalrous spatial frame of reference.

    The surface of the Earth is land to us, but could be a capital good to a hostile alien race who uses this planet as a good where the frame of spatial reference to the alien race might be the “quadrant” of space in which the Earth resides. That space quadrant is “land” to the alien race, because it is rivalrous to other alien races (maybe even humans in some future). Is space “land” to humans? We are starting to value space, but it is all still relative to the Earth’s surface and from a spatial frame of reference based on that. What is that belt of space surrounding the Earth where all the geosnychronous satellites are orbiting the Earth? Land or capital or something else? Is it better to understand it as land because it is not reproducible, or because it is a rivalrous spatial frame of reference for subject actors?

  3. Philippe says:

    “And in a free society, workers can be construed as “renting out” their bodies to earn wage payments.”

    seems like a bit of a weird way of putting it. ‘Renting out their bodies’…?

  4. Tel says:

    I think I’ve mentioned this before, but if you buy an iPhone, is it consumption, or is it capital?

    Actually, it could be either, or both, depending on how you use it. It could even change from one to the other over time.

    • James James says:

      Good point Tel. It’s important to remember that “capital” is an abstraction, an idea. We mustn’t let our abstractions confuse us or blind us to what is really happening in terms of atoms.

      The gold in the mine is still gold. If we dig it up the ore and put in a warehouse next to a refinery, the ore is more valuable because it is closer to the refinery, but it doesn’t matter whether you call it capital or not.

      If you move the refinery to the gold mine, the ore is also more valuable because it is closer to the refinery, so you could now call the ore “capital” if you want but nothing about it has really changed.

      From the entrepreneur’s point of view, he doesn’t care whether the ore was put in the ground “naturally” or whether Superman put it there. It doesn’t matter to him. It seems a bit odd to call the ore “capital” just because Superman replentishes it every week with a fresh asteroid. Nothing is really different. Bob, would you call an acquifer “capital” because it is replentished?

  5. Nick Rowe says:

    I think yours is a good answer Bob.

    Let me throw another one at you:

    Suppose technology is always changing, every period. So that even though we *could* make the same capital goods we made in the past, we would not choose to do so.

    If new cars change every model year, are all cars, except the current model year, land?

    Now think back to my old post on Dutch Capital Theory. If the newly-produced land is a perfect substitute for land we produced last year, or land produced by God, does the distinction matter? For the Dutch, I think all land is capital. The only thing that matters is the degree of substitutibility between newly produced productive goods and existing productive goods.

    (It makes me think that the Sraffian conception makes no sense, in a world where technology is always changing, because the economy never does reproduce itself. Nobody makes the Mazda MX6 anymore.)

    • Bob Murphy says:

      I was thinking similar things, Nick (about land, not about the Mazda MX6).

      • Transformer says:

        “The only thing that matters is the degree of substitutibility between newly produced productive goods and existing productive goods.”

        Exactly.

    • Philippe says:

      I’m not sure the Dutch actually created land. I think they just drained land which used to get flooded a lot..

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