Why is Chinese housing so expensive despite being oversupplied? How did land reforms in Russia lead to the Bolshevik revolution? What killed Georgism? The Economist’s Wall Street Editor, Mike Bird, discusses the underrated economics of land.
You can preorder Mike's book here and read more about land readjustment in Works in Progress Issue 19.
You can watch or listen on YouTube, Spotify, or Apple Podcasts.
Sam Bowman: Hi, welcome to the Works in Progress podcast. My name's Sam Bowman. I'm one of the editors at Works in Progress.
Ben Southwood: And I'm Ben Southwood, another editor at Works in Progress.
Sam: We're joined today by Mike Bird. Mike is Wall Street editor at The Economist. He also hosts their Excellent Money Talks podcast and he's the author of the forthcoming book, The Land Trap: the History of the World's Oldest Asset. So what is this book about Mike?
Mike Bird: So this book is basically something that I've been thinking about for years, particularly living in Hong Kong and Singapore, but also you guys know I've been interested in land and housing issues before then. When I was living in London, what I wanted to do was look at land from the sort of financial asset side of things. I always think about land as it's got the land use, the actual material sort of use of land, which I think is very well covered by you guys and a number of other people.
I think what you probably read less about is land and its development as a financial asset. I started out with a few sort of theses about this book, mostly about Hong Kong and Singapore and Asia, and sort of got down to brass tacks over time and decided this was a story that most people hadn't heard about. It starts 300/400 years ago in colonial America with these struggles to use land properly as a financial asset, which a lot of colonists to then Colonial America subsequently the US struggle with.
I think it's an enormously important asset for all sorts of reasons that intersect with housing. It's a huge driver of inequality. There's huge amount of credit attached to land in the form of mortgages. In fact, lion's share of bank credit works that way and in Asia it's been enormously important to the sort of development story. So that's in Hong Kong and Singapore, but also in Japan, in mainland China, in Taiwan, all over the place. You see these land related stories, how land has been used both well and sometimes poorly to aid in development.
I wanted to write something that sort of covered all of these things and over time it broadened out into this sort of hopefully general financial history of land and why it matters so much both through history and why it matters so much now.
Sam: Does it have a boiled down, if you were trying to summarise it in one line for the Economist, does it have a thesis that you could summarise? Is it just land is very important or is there something deeper than that?
Mike: I think land is very important, is probably the right way of framing it. I think it's very important in lots of ways that you don't understand. There's lots of things that happen in the world that you wouldn't associate as being to do with land or having a land related element, which actually have a huge land related element.
One of the people who I sent it to have a look at, he's a friend and also an author, Matt Campbell said it was really a sort of history of the modern world told through the lens of land, which I think is a nice way of putting it.
Ben: Because you mentioned Singapore and Hong Kong. I want to talk about something that served particular interest to me, which is different kinds of land ownership. So nowadays in the UK in particular, but I think around the world, the US etc, we mostly think about standard freehold land ownership, which essentially you kind of own basically the land and everything under it, usually going down pretty much to the earth's core and you own it with no respect to anyone else.
Sometimes you have property tax or something that you have to pay and sometimes if you want to extract minerals out of it you've got to pay someone, but essentially you own it and all of every bundle of rights with respect to it, you pretty much own.
But as we have learned from previous guests on this podcast and also I've read about, so Hong Kong and Singapore still have leasehold, so they still have a kind of feudal tenure where people kind of own it. You give them the right to occupy and use a piece of your land for a given amount of time, but at the end they give it back and this is existed in lots of countries, but in Singapore and Hong Kong, this is still a major thing, right.
Mike: Totally. Yeah, and I think it gets to something even deeper than that when we talk about leasehold and freehold is one of the things I think people don't always grasp about land. So people like us often talk about there being features that land has that other assets don't have. It's difficult to create more land, it's difficult to move land around, but one of the other ones is that it's extraordinarily long lived, right?
If you think about almost any other kind of capital investment in machinery or intellectual property or really anything either physical or intangible, these things age they depreciate land doesn't really depreciate. So I think that's an important thing and when we talk about freehold and leasehold, you can own a company for a thousand years, but if the company doesn't change, it will be worthless at some point much sooner than that. That's not necessarily true with land, obviously depending on where it is now.
Singapore and Hong Kong both have their leasehold tradition originating in the same place. They're both British colonies, British trading ports, and that's the history of the leasehold and basically the British War and Colonial office starts funding those places, these new crown colonies through land sales land auctions, which in the early 19th century is an extremely good way of funding port a trading city.
You have merchants who want to use the space on your islands as go downs or for warehouses of all types, all sorts of other things. You don't need to tax them with an income tax or any sort of sales tax, which would be difficult to administer. People would get around it and if it was too high, they'd find somewhere else to do their work and somewhere else to be based.
But with the land sales, you can pretty much guarantee who is operating on a given portion of land. These aren't big places. You just need a sort of a map and a series of people to administer where the sales are being made. So it's administratively simple. The better the city does, the more you can make from these land sales.
So basically these things fit extremely well and Stanford Raffles, when he gets to Singapore, he's basically responsible for instituting this system through the East India company. He's sort of obsessive of this. He's tried it in the very early 19th century in Java already where it was a sort of catastrophic failure, but he tried his best to make this system work of land sales and he had this idea that the land sales wouldn't just be a good way of raising revenue, but they'd break these sort of feudal social structure of some of these places, which I think he basically gets from Adam Smith.
It's not enormously clear through his memoirs where he's getting these ideas, but he was a big fan of Adam Smith. Adam Smith, obviously a sort of land tax advocate. Basically Singapore and Hong Kong still have that residue from the early 19th century.
Hong Kong didn't become independent. He was still administered by the UK and now administered by the People's Republic of China. Singapore became independent and hung on to the system in large part because it worked very well for them and also I think because it was the government rather than some other landowner that was the primary beneficiary from this. Since the end of the WW2, they've really headed off in different directions that we can talk about a bit. But yeah, the fact that they've retained it I think is down to those original British colonial roots as port cities basically.
Ben: What is it that gives the land value originally before settlers, a colonists have arrived there, why would they want to buy land and go there in the first place?
Mike: Sure. So like Raffles and the founders of Hong Kong made them free ports, right? So nobody's going to tax you on the way in or out. You can trade very freely from these places. It's under the auspices of in Singapore of the East India company is a sort of protector.
So basically the propensity of people to turn up in these places and start establishing operations to start trying to trade is enormous. And in fact, if you read through the memoirs and the papers written by the people who were the original colonists in these places, your Pottingers, your Raffleses, they're constantly surprised by how quickly people turn up, particularly people from the southern Chinese coast who just the second you say, I'm setting up a Freeport, they're on the junk boats and they're heading towards you.
It was a sort of immediate thing where there's this constant level of surprise how rapidly the population rises, basically anywhere you set up a Freeport in that part of the world because taxes elsewhere, pretty onerous governing systems are pretty poor. So it, it's enormously advantageous if you're a merchant in that part of the world.
Ben: And so the people buying the land are locals or from China and Southeast Asia or are they from Britain in this case or are they from Europe.
Mike: Initially? They're mostly from Europe. There's a few people who sort of specialised in trading in what would've then been the near East. They're mostly British companies and they're mostly the old sort of in Hong Kong you have the first land auctions, really the Hongs that we now know, and some of these companies are still going like Charlie Matheson, Swire, big East Asian trading companies, British and origin, but run by families that have been in that part of the world for centuries where their real focus is on trade in and out of China.
Those are the biggest purchases of land initially. And then as time goes on, you see local big companies emerging, particularly in Hong Kong in the middle of the 20th century, you see this huge transfer of business activity going into the sort of ethnically Chinese Hong Kong businesses. So that changed enormously. Mostly it's British sort of traders to begin with.
Ben: So these governments are selling leaseholds that is the right to occupy and use land for a period of time and pay a ground rent of what, 99 years or something. So will we see the original leases expire around the same time as handover or would they sell in for 10 years? What happens when the leases come back? Is there widespread acceptance that the government will resell the land on the best possible terms or are they expected to renew existing arrangements? And by the way, why did they do 99 years rather than 100? I've never understood that.
Mike: You know what? I've not grasped why they did 99 years and rather than a hundred and in fact in Hong Kong you saw the leases change quite a bit, right? So the original instruction that goes out both in Singapore and Hong Kong is that the administrations are to basically sell land for as long as it takes for it to be productively used for people to invest in it and want to invest in it and make a profit, but basically no longer than that and people settle around 99 years.
But there are some land leases in Calhoun, I think that were several hundred years. Some are short, it's 50. So people have sort of varied around a lot. I'm not exactly sure why 99 years ended up being landed on, but it did.
The question of what happens when they're renewed is an interesting one, and I think it's one of the biggest criticisms of this model in general is that you come under significant political pressure as lots of leases are ending at the same time, particularly when it's residential housing, to basically just renew them for close to nothing for the people living in them.
I should say in Singapore, the system's quite different. It's the one in Hong Kong now because of the way things have headed off in separate directions. So I think the best way to think about it is in Hong Kong by fiat, the government owns all the land At the time of independence in Singapore, the government owned a large amount of land but spent a long time acquiring land at wildly expro prices, incredibly low prices that the government was acquiring land for by fiat in Singapore and they used a large portion of that land for the housing and development board, which is to build this sort of unusual housing in Singapore. Singaporean own the leases for these, but they're extremely restricted in terms of what you can do with them from a western perspective. As a Singaporean, you can own one and only one.
You have extremely generous terms in terms of getting a mortgage from the compulsory Provident fund in Singapore. But acquiring lots of properties in the private market by borrowing to get them is extremely difficult. The amount that a bank can lend you to buy a private property in Singapore is extraordinarily restricted, and as you buy more, it's even more and more restricted to the extent that if you're buying a fourth, you've basically got to pay up in cash. You effectively can't borrow to get this.
So in Singapore they've used it very differently. They use that for all sorts of things. The fact that they have this system allows them to do this incredible management of individual estates where they determine the racial mix of a HDB estate. So if there's too many ethically Chinese or Tamil occupants of a given estate, they'll basically say to anyone selling on their HDB that it has to go to someone of one of the less represented races, which is sort of fascinating. Singaporean, the sort of cross between laissez fair and absolutely extraordinary social management that Singapore has, I find to be really interesting and unique, and I think that comes across in the way they use land quite a lot.
Ben: So this model of selling leases to fund the ongoing expenses of a local government hasn't gone away because one of the things we've talked about from your book before that you've told me about is that this is how Chinese local government funds itself. Am I right in thinking that they sell 70 year leases to developers to fund how they worked? Can you tell me more about this? That's all I know.
Mike: Absolutely. So basically this begins kicking off the seeds of this start in the 1980s, right? Deng Xiaoping is reforming China. He's doing this very steadily because the sort of political coalition building to go from a sort of command economy into a more market oriented one is difficult to build. He spends a long time doing this.
There's a sort of grand irony in where the rules come from. So China, essentially Chinese reformers want to copy the model that Hong Kong has. So they want to use, they hear that Hong Kong owns a hundred percent of the land in Hong Kong and they lease it out to people. If you're a Chinese communist, this is understandably quite an appealing thing.
So the communist constitution in China says that the state owns all the land, so no change required there. You just sell land use rights, you're not selling the land, so you get to keep parts of the existing system. So it's mostly copied from Hong Kong when it's adopted, it's adopted very steadily in the 1980s, you have these test cases. Shenzhen is the first place where there's a test case of auctioning land for use mostly by foreign manufacturers, foreign businesses. It's a way of raising enormous amounts of money, especially when you are otherwise quite worried about foreign capital, foreign investment, borrowing from foreigners. Certainly and effectively this system sort of starts to kick off late in the 1980s.
What really fuels it, which I know you guys have written about before in works in progress is this 1994 change to the Chinese tax law, which basically means that local governments, which previously had been responsible for a huge amount of the revenue accumulation and a huge amount to spending start to be responsible for the same amount of the spending, but all of the revenue that they make from ordinary tax routes goes to the central government first, and the central government decides then how much to reallocate to the local governments. So they're enormously s struck. This is a difference between, I think the region of it goes from 30, it goes from 70% of their spending being funded directly by their own taxes to 30% overnight. It is a huge, huge change, and the way that they make up the difference here is with land sales, which don't count as the revenue that has to be remitted to the central government. So they're given this enormous incentive.
The flip side of that is that Chinese households don't really have anything else good to invest in. You've got nothing that will provide either decent income or capital accumulation. Go and Google a chart of the Chinese stock market performance over the last 30 years. It's amazing that you're in a country that has been growing at sort of seven 8% GDP per capita over that period that the stock market's done basically nothing.
So anything else you invest in is going to be wheedled away by financial repression and all sorts of things. So there's enormous demand on the household side and enormous interest in supplying from the local governments, which is basically fueling the entire thing.
But the grand irony in all of this I find, is that they're essentially taking the British War and colonial office model. They're taking what raffles brought to Singapore and what the administrators of Hong Kong brought from the uk. I think largely not very well known by the people implementing the system that they're pulling on a thread that goes all the way back to the management of the British Empire almost 200 years earlier. So I find that all really, really interesting.
Sam: Is there a common thread as to why this is happening in Asia in particular? Is this like an Asian thing or is it just coincidence that this thread runs through all these different countries?
Mike: So I think the answer to that, and I've been thinking about it for years now, why does this happen in Asia? And also if you look at house price to income ratios, there are some measures of this in cities across East Asia that are just absurd places that make London and San Francisco and New York look astoundingly cheap, including in China, cities that almost nobody outside of China knows about. You're talking about second and third tier cities where housing is inordinate expensive.
I basically think it comes down to that financial repression model that comes through with East Asian development states. If you have capital controls, you won't let people invest overseas and you don't provide a sort of financial market that's based on returns for ordinary investors, that it's oriented towards funding either state backed companies or particular export oriented industries, and everything is structured around getting them cheap funding. You are going to repress the financial activity, the ability to make returns among households.
Then land is always going to be a great thing to invest in only so much you can sort of smother the returns to it's either valuable or it's not in a way that you can fiddle in lots of ways with what happens with a private company. It's much more difficult to do that with land, and I think that's basically the answer.
It's true in Japan after the second World War. It's true in Korea through parts of its history. It's true in China now. It's actually true in Taiwan to some extent. I think that's the thread that runs through it.
Ben: Do we need to introduce a Brit ISA in the UK so that we can fund our noble, homegrown British land rather than sending our investments into useless foreign stock markets?
Mike: Yeah, that sounds like a great idea. Just there's a bit of financial repression for the UK would do wonders.
Ben: One thing that might, well, that might help though. So I'm very interested in, so on the one hand you are saying, and I by the way believe you, that these Chinese cities are because of their incentives that they can only generate revenue by selling leases to build property and because everyone wants to invest in property, the only thing they're allowed to invest in that work can't be robbed from them very easily in the future. There's a massive oversupply of housing, but also that property prices as relative to income are extremely high.
But is it also true that rents relative to income are extremely low? So the properties have very low yields, but very high prices.
Mike: Properties in China have extraordinarily low rental yields. You're talking about very, very low single digits. Often the most popular cities, you're talking about less than 1%, right? So in a country that's growing, I mean now it's growing 5% per annum or whatever, but it was once growing at 10, 11, 12, and you're getting a sort of sub 1% yield. Honestly, rental markets in a lot of Chinese cities are very small as well. They really don't exist. These are home ownership oriented places.
I think there is, I loathed to bring this up with some people who, like me generally believe quite strongly in efficient markets, but there are some sort of obvious speculative behaviours going on. There are people in China who will save and save and save to buy a second and a third and a fourth property if they can get their hands on it. These are not rental properties. They're left vacant, and these are in families where the family structure is getting smaller and smaller with every generation. They're not to pass on.
I think it is a case of both a historical attachment and the fact that there is really nothing else to invest in. Also, lots of Chinese buyers completely rationally got the idea for a very long time that for political reasons, despite the fact that it's not a democracy at all, that for political reasons, the Chinese government would simply not allow house prices to go down, that this was part of the social compact and that they wouldn't permit it to happen. And if you believe that, then obviously it's worth buying property at almost any price. If you believe the dynamic is that the government must ratchet the price up, then it doesn't matter how expensive it's or how low the rental will yield is because it's one way travel. So it's not a totally irrational thing, or at least it wasn't for a very long time. The last few years have sort of questioned that premise pretty aggressively, but I think it was pretty sensible of them for a very extended period.
Ben: That sounds like then that basically, it's very interesting coming from a perspective where we talk about all the time we're thinking about housing supply. The problem is we don't have enough housing supply. If our local governments were given the right to print money by selling off leases, this would be like a gangbusters policy reform for the UK because right now that's the kind of thing where we are very much not in the situation of only having houses to invest in. We just don't have that many houses to invest in. So that's very interesting.
One thing I've heard about is that despite all of this, Hong Kong has a housing shortage, and that sounds reasonable when you think like, oh yeah, okay, Hong Kong's just this tiny island with loads of islands on it. But then I discovered that about 95% of Hong Kong is unbuilt and loads of that is farmland and lots of that farmland is not even farmed. Can you tell me what's going on here?
Mike: Yeah, it's a great question, and I think just on the previous one, one of the things that the best explanation that was ever given to me on this was that China manages to exhibit all the worst symptoms of both a housing glut and a housing shortage all at the same time. So extraordinary waste in absolutely rampant building and places that nobody will ever live at the same time as like 20, 30 times price to income ratios are quite common. Threading that all together is complicated, but it really is a pretty awful system in lots of ways.
In Hong Kong, the relationship between the government and the developers I find enormously interesting. So you've basically got to go back to the 1960s to I think start this story. The Hong Kong population is absolutely booming, partly because the cultural revolution, partly because people have lots of children and it is a space constrained place. You're right that there's actually a lot of place space that you could build on, but it is a space constrained place and house prices and rents are going crazy in Hong Kong.
You start to see these local players emerge and they're taking over from the honks. These are people like Lee Ka Shing. There's a handful of major real estate developers. There's a system that's brought in which transfers development rights from farmers in the new territories of Hong Kong, which is essentially you have Hong Kong Island that everyone knows Calhoun, the new territories go all the way up to the border with mainland China. They're at this point, mostly rural, large parts of 'em still are, right? They have interesting sort of clan rights to the use of that land in some places.
But basically the idea is you can get these farmers to sell the land to the developers and they'll be able to use it. What happens is you get these letters, these transferable rights, letters A and letters B, and the letters B. These real estate developers accumulate in enormous numbers. Again, I don't mean to be too market inefficient. A lot of these farmers are functionally illiterate and they're selling something and they really don't have a good idea of the value of it. The real estate developers start accumulating them.
A lot of the battle now in Hong Kong between the developers and the government is around the use of these development rights. So the developers say the government has made it too expensive to convert what the existing agricultural land they have, and they have the development rights, but you still have to pay the government to convert it into residential or urban space. The developers say it's extraordinarily expensive to do this, it's too expensive, and that's not why we're not doing it. The government says the developer's being greedy, et cetera, et cetera.
But I think the real reason behind this is that the Hong Kong government's incentives are a bit mixed up now when it comes to land prices. So basically all of the investment spending in Hong Kong is meant to be paid for by land auction revenue. As such, you need land prices to be high to some extent, and this has led to what is called in Hong Kong a high land price policy. This is both the government now it's the government under British rule as well. It got this nickname in the seventies, and it's basically just never changed.
That would be the sort of high land price policy model for why you don't get all of this land released for house building, and it's because the Hong Kong government incentives run in the wrong direction. Whereas in Singapore, they've run towards having a 90% home ownership rate. The Hong Kong government has focused on revenue maximisation in a way that hasn't necessarily led to the most houses being built.
Ben: Very interesting. I've also heard, and this is maybe as too much for rabbit hole, but it's intriguing. So you told us that Hong Kong owns all of the freeholds of Hong Kong. Still the Hong Kong government does, but it sells off leaseholds. But I've heard that it has an extraordinary power that no other freeholder has, which is that it can arbitrarily decide to resume its freehold at any point and pay off the people. Now, why doesn't it do that with, I know most buildings in Hong Kong are pretty tall, but they're not all massive skyscrapers. Why doesn't it resume the leaseholds and kick all the people out? Is this just a political issue?
Mike: That's exactly it. That's exactly it. I mean, it's funny because I think a lot of people struggle with this, especially when they live in a democratic system hearing about it, and Hong Kong's not a democratic system really. It has limited local democracy powers, but the government could trample people in a way that you couldn't in a western country, that there is still immense political squeezes on them.
The families that live in the new territories are enormously political powerful. These are sort of the original Hong Kong residents, the clans that have lived there for hundreds and hundreds of years. It's actually really difficult to expropriate these people essentially, which I think the government in lots of sense would like to do.
I also think there's something in the Hong Kong government, which is that they genuinely have been very successful by being less, say fair. If you look at the post-war period in Hong Kong, Hong Kong charts this path that almost no one else in the rest of the world is taking, right? Everywhere in the rest of the world is all, let's say fair is dead. Industrial policy is here, we're going to intervene in every market. We're going to have welfare states, we're going to have everything. Hong Kong says, absolutely not. We're not doing any of this and prosperous through in large part not doing it.
So I think there's a deep vein of dislike of intervention in general and people who just don't want to do it. Whereas in Singapore, you have that sort of unusual blend of active industrial policy in some areas, extraordinarily interventionist policy and land while actually being quite sort of liberal and pro market in lots of other ways.
Sam: So we've talked a lot about China, Singapore, and Hong Kong. Now I have some questions about Korea, Taiwan, and Japan. So one thing I'm aware of is that Korea, Taiwan, and Japan all had massive post-war land reforms, right? So all the land in the country got taken from the big landowners and split up. If I recall correctly, in Japan there was a maximum landholding size imposed after the war, and it was like an acre or three acres or something like that. So an astonishingly inefficient spread of everyone as though we were going to be like mediaeval subsistence farmers across the entire country of Japan.
And yet soon after that, Japan has an agricultural revolution, becomes very productive across everything, has massively growing cities. How is this possible, and tell me what happened in the other countries as well.
Mike: Absolutely. So I would say that these three places, Taiwan, Japan and South Korea have these sort of unique political circumstances that allowed this to happen. It's why there were dozens of attempts to do this in other parts of the world, none of them anything as sort of comprehensive as in these three places.
Basically Japan goes first, it's 1945. Japan is materially devastated, and MacArthur General MacArthur wields more power in Japan than probably any American has had over anything ever, right? He's essentially got the powers of a king, right? He's the only American king ever.
And he becomes this enormous land reform proponent. There's a guy, Wolf Ladejinsky, who works at the Department of Agriculture. He specialised in Japanese land and he's become obsessed with the idea of land reform, of redistribution from large landowners to tenant farmers. And basically he sells MacArthur on this. MacArthur doesn't need much pushing, but he becomes a bit of an obsessive.
So MacArthur forces the Japanese government to bring to him a law expropriating the large landlords, and handing the land out, and MacArthur sends it back and says, you're not doing anything like enough. We need to expropriate dramatically more middle-sized landholders. And so they do this and land reform happens and it's one of the biggest sort of redistributions ever really outside of a communist country, which I suppose isn't redistribution in the same way, basically a huge amount, I dunno the numbers to hand, but as you say, these are pretty small parcels of land. Often they're not economic to run at all.
Now if you look at Taiwan and South Korea, you have similar stories. Taiwan not governed by America, but at the end of the Chinese civil war in 1949, Chiang Kai-shek, the leader of nationalist China, arrives in Taiwan. He imposes martial law soon afterwards. He's got no Taiwanese power base, right? He's brought with him several million people from the mainland, including the remnants of the nationalist army. He doesn't have to accumulate political support in what remains of Taiwan. He's repopulating a large part of this country, and in rural Taiwan, he has no power base really, it's extremely limited. It's mostly urban Taiwan where the people from the mainland move to.
And in rural Taiwan, you can actually gain quite a bit of support by giving tenants all of this land. Again, this is supported by the same cast of characters from the US who arrange the land reforms in Japan. Wolf Ladejinskyi is in Taipei. There's also a bunch of other people in DC who are very in favour of these policies. Something very similar happens in South Korea as well.
And in all of these places, the huge fear is that you either do this, you either make this payoff to a huge number of peasants or you get communism. And when you're the government of South Korea or the government of the Republic of China, that threat is not an abstract one anymore, right? They're doing land reform in North Korea before they collectivise everything they give land away to peasants. So you have to sort of follow this just to politically keep up.
So they had these enormous schemes, but these extremely unique political circumstances that allow them through in this very, very brief period when the landfall movement trickles out across the rest of Asia, everyone's trying in Southeast Asia, they're trying India dramatically less successful.
And there's an argument about what the sort of economic impacts of these are as well. Some people very, very positive about the economic impact in Japan. It's a really good recent paper that looked at the Taiwanese impact and found positive economic impacts from only the first stage of land reform at later more expropriate stages as you didn't have the sort of positive impact you were looking for. The idea being there that an individual tenant farmer has more interest in maximising the use of the land that they're given. But yeah, this was not a success anywhere else. These three places really sort of lasting, sustained and embedded land reform. It's basically just there everywhere else in the world it was at least messy and often just a total disaster.
Ben: This dovetails with another thing I'm very interested in and have been interested in over the last few months since I discovered it, is there's a policy invented in Germany in the 1890s by the mayor of Frankfurt who also invented zoning, had the first zoning system called Land readjustment and what in Germany, the purpose of this was for taking inefficient plot sized farms and turning 'em into larger ones, either just to be better farms or to be used for housing. They were in inefficient plots. And we, we've all seen, I mean if actually we've all seen this probably exaggeration here, if you like me, spend a lot of time going on satellite views of different cities around the world, then you'll have seen interesting town shapes where the plots of the mediaeval plots called burg plots, the long thin plots, the mediaeval plots have determined what the city looks like. And so the most extreme cases are in Poland, but basically when you combine roads with thin plots, you get a bunch of houses on these little attachment roads to a main road and you never get any grids or a sensible logical village shape anyway.
In Germany, they use this policy called land readjustment. What's really interesting about it is that you have to get a double majority. So you have to get two thirds of landowners by number and two thirds of landowners by landholding, and then they reorganise the plot. So it's more efficient. And in Germany, they did this to, I dunno, a hundred million hectares, like 40% of all German farmland after the second world war went through land readjustments. And there's a sad side about this I don't like to talk about, which is that they got rid of most of their hedge rows through this because they were like, no, not efficient anymore. And I'll be very, very sad if someone did this to the English countryside. But anyway,
I understand that. Interestingly enough, Japan in 1916 liked the German system, copied it into their planning law. And then when Japan invaded and colonised Taiwan and South Korea imposed it on them as well, and they kept it later. And so all of these countries had a tool which allowed them to deal with the worst excesses of land reform. And I wonder if this was one other reason why land reform was uniquely successful in these three countries and not elsewhere.
Mike: I think that is reasonable, and it's Annie Martin wrote a wonderful piece for you guys on the experience of land readjustment in Japan. You guys know as much about this as I do, but the handing out of land to very large numbers of people and the fact that a lot of the plots were really not economical in a meaningful way at all. That combined with the extremely rapid urbanisation that was happening in Japan, obviously these are to some extent two sides of the same coin allow for this to happen.
So you see not just that, but all through the second half of the 20th century, or at least the first 30 years, 40 years after the end of the second World War, you see this huge transfer of land owned by households in Japan to companies. And this is a large part, an urbanisation story, but it's this enormous sectoral transfer. I, I'm really interested in this because it's an important question for large parts of the rest the world as to how this is done. Well, and I wanted to ask you actually, is there anything about the sort of German or Japanese systems, anything that you've seen given a lever that you would apply to the western world, apply in the uk, apply in the us basically, what do you think these systems have that has made this sometimes successful that has been missing in the rest of the world?
Ben: Well, so as a tiny little tidbit. I happened to discover recently that the process of enclosure actually used the land readjustment model. So in Britain in like 1500, about 30% of land was common land. Now the common understanding of common land is that everyone could just graze their people there, graze their animals there. That's not true. You had to have other land, you had to be a landholder in your own right to have a share of common land. And usually you had a share of common land that was in proportion to your share of the, you had rights to common land that were in proportion to your share of the other land. So in fact, all the landless labourers, which were like say 40% of the people in the 1700s had no right to this common land at all.
But interestingly, when they enclosed this land, which has turned it into individual private plots, shared it out among people, they used the system initially you had to get a hundred percent approval, so everyone had to approve, and they basically only got it going in giant landholder areas where one guy could send his goons, obviously the other guy's houses and say, you're going to approve of this, you can have your, but later on they got it to an 80% system. And so 80% of people had to petition parliament.
So this kind of system, same kind of system used in Taiwan, Japan and South Korea today and over the last 50 years, and the same system used to reorganise German farmland is what was used in the UK. But the UK actually has efficient plots of land now most of the time. And we have good mechanisms for making them more efficient. And that's not a big worry for us, unlike in Japan.
The thing we don't have I think is our system for deciding who is allowed to build what in a particular place is very confusing with loads of overlapping rights and the wrong incentives and so on. And so I would like to learn a system from land readjustment where you can use that same mechanism of letting the majority decide not what gets done. Because if it was just permissions, then it wouldn't necessarily oblige you to use those permissions, but letting the majority decide, okay, let's find out what the best thing for everyone is on a smaller scale than across the whole country or across a whole council area. And I think that you could do that through giving people the right to up zone their own street with a super majority, I reckon like in land readjustment.
A question I wanted to ask you. Ben, before you do that, can you actually explain what land readjustment is for people who don't know?
Ben: Yes. So land readjustment, the original form in Germany, basically a bunch of landowners get together or a local government or the national government comes to them and says, we want to reorganise land in this way. And so usually the reason for farm land readjustment would be because farms are in inefficient plot shape. So in the mediaeval era, if you're a villain, then you would have a bunch of strips of land that you would have hereditary right to farm, spread around a big farm in your manner, and there'll be a freeholder, which would be the lord of the manor, and then you would be this villain who could farm those strips and they were spread out. So it was quite inefficient. You spent a lot of time moving your plough from one thing to another. And this happened in lots of different countries, but on the plus side, you had a fair share of all the different fields. So if there was a bad crop in one bit of the area, then you wouldn't necessarily die, which is a good reason for it. And over time, everywhere wants to rationalise into these into more efficient farm shapes and enclosure did that. That's one thing Enclosure did in the uk. And land adjustment is another mechanism for doing this.
Basically the same thing. You go around and say, we are going to turn it into, instead of you having eight plots spread across all these different places, we're going to merge them together. And this is roughly the same value. We've got a committee together who's judged that's roughly the same value. Everyone gets the same value farm out of the other side, but in fact, you raise all of the value in total higher because you don't have to move your plough between all the different places. So that's classic farmland, readjustment.
You might also do it to turn farmland into better building land. So if you want to develop a plus land and it's got a hundred different plots, it might be really hard to get everyone to agree and then you might have to build this pockmarked weird shape development that's much less efficient than if you could just get everyone to agree. And so that land readjustment, which is the kind that was built most of the houses in Germany on greenfield after the second World War and built 30% of Japan's urban areas is where you agree, okay, we're going to consolidate all our land, build a development on it, and then give everyone a share that's the same as their share in the value of the land as it was beforehand. And usually you have to pass a majority, which is two thirds of the individuals who have land agree. And also two thirds of the value of land is voting for yes, in practise. Many countries have required higher thresholds to do it because they didn't want public blowback. But that's the basic principle behind land readjustment.
And that exact think system applies now and is important in Japan, Taiwan, and South Korea and versions of it exist in lots of other countries like Spain and Germany, but for various reasons it's not used as much in some countries versus others due to quirks of their various systems.
But the question I wanted to ask Mike is I was really interested that you haven't yet mentioned an ideological reason except for a brief one where you said that the Chinese communists were happy to use it because it seemed consonant with their ideology. But you haven't mentioned like a deliberate ideological mechanism. But I'm aware of various American cities that were inspired by the ideas of Henry George and they thought, I'm going to do what Raffles did for what sounds like pragmatic reasons that I'm going to set up a new town and then sell leases to it. And so effectively people are just paying me in land value because the idea was a land value tax.
So am I right in thinking that you don't actually have a ideological, you don't think there was an important ideological reason why Singapore, Hong Kong and China and then maybe these other countries had lease spaced tax raising?
Mike: Certainly it's not from Henry George that these parts of the world end up having it, but there is an influence there. As I said, I think at the beginning, if you look through Raffles, memoirs and documents that he wrote and letters that he sent people, the sort of admiration for classic political economists like Adam Smith is quite clear. Adam Smith, obviously a land value tax advocate.
Now interestingly with Lee Yu, who was a big, essentially land value tax guy, or at least someone who said very clearly and publicly many times that basically the uplift in land value should not accrue to private landowners never actually really said anything about Henry George specifically. But the idea is that there's a thesis that he picked up some of these ideas when he was at the LSE before he was at Cambridge from sort of Fabian economists who were teaching there at the time, people like Harold Laski, there's a thesis there. So some of these ideas might have germinated that way, but it's mostly, I would say a sort of slightly more practical thing.
Oh, I would actually say one difference there is that Sun Yat-sen founder of the Republic of China, then Taiwan did encounter the reading of Henry George when he was in the West, when he was still in exile and became really an actual Georges, if you read the things he wrote, he was very, very clearly influenced to that extent. It's the reason why Taiwan is, I think the only country in the world today where land value tax actually constitutionally embedded. It's actually in the founding documents because Sun Yat-sen was a personal obsessive with this stuff, but I think it's mostly more incent based and more that these systems have worked over time for the places that they're in.
Henry George I find really interesting precisely because he's not really like the Adam Smith view of this is a efficient working tax. It is difficult to avoid. It's not distortive of other behaviours, that sort of classical economic view of land taxes. Henry George is a pure ideologue, right? He's like a lay preacher more than an economist. I think his economic thinking is interesting. Some of it I think is close to some of it, especially on the exact dynamics I think are quite muddled.
But he's basically a sort of, yeah, he's a firebrand. And what he did more than any of these other figures was he created this enormous national movement backing him. He sort of proselytises very religious terms that he uses when he's talking about the inequality and the sort of injustice of concentrated land ownership and land monopoly.
And it's the perfect time in America to do this as a sort of political entrepreneur because the frontier is closing at this point. So you have a country, a continent that was defined by its immense richness in land. The fact that land was extraordinarily plentiful in America and this period of time is basically ending just as Henry George arrives with his thesis, you're having these American cities that are booming in population, they're seeing sort of urban problems that you would've associated with Europe previously emerged for the first time. You're seeing slums, you're seeing massive overcrowding, people who want to be freehold farmers in the west, there's no longer any land for them to have. They have to buy it from someone. They can't just turn up as they had been doing for hundreds of years.
So George I think ends up in this sort of fascinating period and he becomes, I would say in the late 19th century, the sort of most prominent and influential political theorist of any type, right? He's running this extraordinarily broad social movement that takes in people in working class social movements, sort of burgeoning trade union movement in the us. It has a huge appeal internationally, particularly in the UK where land ownership is much more concentrated than it is in the US at this point. So it spreads internationally.
And then as you guys know, but maybe not everyone else does, and maybe not everyone's heard of Henry George, this all disappears incredibly quickly by the sort of middle of the 20th century. It's gone. And frankly, by the end of the first quarter of the 20th century, it's basically gone, having been at the end of the 19th century plausibly the most sort of, well, the most popular liberal or progressive theorist and bundle of ideas and ideology that there was anywhere in the western world and within the space of a few decades, it's completely gone. So yeah, some of the book is about this, and I find this all really interesting.
Sam: What talking about I think is really, really a completely forgotten vein of history, not just in terms of the intellectual history that you're talking about. You already mentioned Sun Yat-sen being heavily inspired by Henry George, but this was a factor in revolutions and nationalistic movements throughout the entire late 19th and early 20th century.
So you can go to the Irish independence movement, which was preceded by a land reform movement that was directly inspired. I mean, Henry George was a journalist in Ireland for a part of his career and had kind of deep links with Ireland. You can see a guy called Michael Davitt who basically everybody who studied history and I'm an Irish school, will know the name of his very, very prominent land reformer in Ireland, who quotes Henry George at length in speeches that he gives. He goes around both Ireland and England speaking to audiences of people quoting this.
But even if you go to Russia, we ran an article on Stolypin, and I don't know if anything that Stolypin did was directly inspired by George, but the problem was the same, which was that you had huge amounts of land holdings that were being worked on by peasants who didn't own the lands that they were on. Russia obviously among European countries was very late to change this and to reform its land holdings like this and ended up actually only really doing it via the Russian revolution doing did it in a peaceful way. That was even long after serfdom had been officially abolished, the peasants in Russia were still effectively living as serfs as tenant farmers of their landlords.
Stolypin developed a kind of vote based system, which we wrote about, which is a really interesting piece to allow peasants to basically effectively decollectivise their farms and either gain some of the land or free themselves from the land and move into the cities. But again and again, you see this, it's only with the Russian revolution and the Stalin biography that, how have I forgotten the name of the guy?
Sam: If you look at Kotkin's biography of Stalin, his story of the Russian Revolution is really that there are two revolutions. There's the one that we all know about the revolution where the czar is killed and where the communists, the Bolsheviks take charge of the cities, but also there's a revolution in the countryside, which is a almost separate revolution. It's this that enables the Bolshevik revolution, and this is peasants rising up and taking ownership by force of the land that they're working on.
And then you have the problem that land readjustment in investment in Germany was intended to address, which is you have incredibly fractured land ownership and you have this declining output of farms because extremely fractured land ownership is not very effective, even though they have the new economic policy which could have preserves markets in the countryside, Russian output is falling. And so part of the motivation for Stalin's collectivization of farming, which ends up killing many millions of people, is this idea that you can consolidate land holdings and mechanise, and that will then generate the revenues that Russia needs to industrialise.
The same thing happens in China, the Maoist Revolution. So all across Asia, the communist revolutions are driven not by proletarians in cities for the most part, they're driven by peasants in the countryside who want land, and they are repeatedly promised land. And then a couple of years later, as in China, they've given the land, they killed all the landlords, and then five years later they say, oh, you know what? This isn't actually working very well. We need to consolidate this land holdings via collective farming. And then in China it's case you get the great leap forward and many, many tens of millions of people die.
But it's interesting that what you're describing, all of these roots of Georgism, even land readjustment, which is in some ways a peaceful democratic way of doing what Farm Collectivization tries to do completely unsuccessfully by basically every standard, but all of what you're talking about is kind of forgotten today. We just don't really think of land as being this really, really important driver of political change in recent history. But it is.
Mike: So I absolutely agree with that. And I think the Russian revolution is the right hinge point to identify for a number of different reasons. The first of which is that in the grand scheme of things, Georgism is sort of firebrand movement and it's expressed in these sort of proselytising Christian terms, but ultimately it's pretty soft, right?
Effectively it was usurped by a much more hardcore political system where if you started believing what Henry George says about land, Henry George has this very sort of hard line. All of this is true for land, and I'm a complete sort of free trading market liberal for everything else. This is actually a very hard ideology to sustain among a large group of people that are much less committed to the specifics of it than you are.
So you end up with Henry George essentially being the handmaiden of much further left socialist movements in the US both before and after the Russian Revolution. And essentially the movement is completely ert either by people who say was sort of much more sceptical about redistribution now because we're anti-communist and we're not into this anymore. Or by people who say, okay, well Georgism was all very good, but I actually prefer being a communist now. Right? I'm much more left wing than that, and Henry George is right about land, but also, let's apply that to literally everything else. The government should own all of it, or all private ownership should be taxed at a rate of effectively a hundred percent. That's basically what happens. So it collapses in on itself very, very quickly. It's already weak in the run up to the Russian Revolution, but the Russian revolution is basically the death. Now for this,
I'd also say it interacts with the land reform movement quite a lot in a way that I alluded to earlier, which is someone like Wolf Ladejinskyi, one of the most prominent land reform advocates ever, and a driving force behind it in all parts of East Asia. He'd been born in the Ukraine, and he had seen the Russian Revolution firsthand, and he'd seen exactly the promise that you're talking about, Sam, which is communists coming in and saying, we're going to take the land away from the landlords, your eternal oppressor, your ancestral foe, and we're going to give it to you.
And they do this very briefly before they collectivise everything and ship everyone after wherever they wanted to send 'em in the first place. And Ladejinskyi saw this and he said, there's no way the sort of democratic capitalism has an appeal to a landless tenant farmer working for someone else, they're always going to go for the communist option here. You need to give them something else on top of that. As I say, in most places it's tried not particularly successfully, but that's basically his thesis. You can either have land reform or you can have communism, but these are the only two options open to you, and if you don't go for land reform, you'll get the communism eventually because these people, these sort of hucksters will convince the peasant class in lots of different countries to do this. The revolution will come from the countryside.
He thought this because he'd seen it happen himself, right? His family are all grain barons essentially. They were the sort of focus of this. Now he's not a crow landlord person. He basically thought if you don't have more equitable distribution of land, you would end up with political entrepreneurs, violent left wing, political entrepreneurs winning in the end.
Sam: Are there any countries today that still have this question unresolved or did the world just via communism basically resolve in a very unsatisfactory way this problem?
Mike: Well, there's lots of countries. There's a sort of pivot after the peak of excitement about land reform towards ideas which are more oriented towards land as an asset and secure property rights. So you guys are very familiar with Hernando de Soto and all of that. He captures this wave of interest later in the 20th century.
There's still a lot of that going on. There's still a lot of parts of the world where the ownership of land is actually not very clear and the rights to use it for all the sort of financial means by which you might use land for loans or anything like that are not very clear. So that's still a big deal in large parts of Asia and Africa.
What I think is equally interesting is the fact that some of the land reform impetus is killed by the Green Revolution, which basically exactly as you said, Sam, in terms of communists thinking that collectivised agriculture would be much more productive, that you could invest more, that the use of machinery would be more extensive. Basically, the green revolution arrives in the post-war decades and sort of sixties and seventies onwards and suddenly starts to make land in the form of very small individually farmed small holdings look lots less attractive because the yields you can get from these new, but at the time, relatively expensive strains of genetically modified crops are much, much higher and they lend themselves much more towards larger farms.
And Norman Borlaug who invented the dwarf wheat that basically saved hundreds of millions of lives is quite clear when he talks about it that lots of people cared about the equity of land holdings at the time, and he said openly, I don't care about any of that, right? We need maximum yields so that we can feed people so that they don't die. Right?
And you see this big clash in the seventies in particular, whether the wind is sort of coming out of land reform for other political reasons as well, where the sort of argument that, oh, we'll have higher yields if we have individual farmers concentrating on the plots starts to lose plausibility because of this massive revolution in the productivity of agricultural land. It becomes clear that actually bigger farms are not necessarily going to be less productive, and in fact they're likely to be more productive.
Ben: One thing you mentioned was credit. Could you explain what you think the importance is there?
Mike: Absolutely. I mean, I think talking to the audience of people who be listening to this, they're familiar with the housing theory of everything. So I can skip past all of the land use elements of all of the things that land use and housing is extraordinarily important to in terms of the downstream effects. But when you're looking at it as a financial asset, credit is enormously important.
Land is a very widely owned asset, largely in the form of residential housing. It's much more widespread in its ownership than say any form of financial asset. If you look at the stock ownership in the US for example, there's a very, very small proportion of people that actually own the vast majority of the stock market. That's not an enormous problem because there's no limit to the size that companies can grow to and the number of shares they can list and whatever the cap there is on dynamism in general, and it's a system for turning dynamism into securities and then you can keep selling them. And that's why these big companies expand.
The sort of restricted nature of land is what changes that a little bit. When we're talking about land and credit, the easiest way of accessing a loan in the vast majority of the world is against land or the property on top of it, and the property on top of it, of course, containing the value of the land beneath.
That's partly because of government fiat because there are all sorts of subsidy and assistance schemes that have made this the case. A lot of them emerge in the US in the 1930s, almost everywhere has favourable terms for lending against land and housing.
What this means in practise is that if you already own land, and especially if the land you own has seen a huge value uplift, you have significantly better access to credit in all forms, anything that's tied to the land as collateral than other people do. You see this hit sort of extreme versions in places where you've had a very, very rapid runup in land prices. So Japan in the 1980s is a great example, right? Huge, huge swell of credit in Japan, huge amount of that tied to the value of land. Now, if you happened to think in the early 1960s, oh, I'm going to buy some land in the centre of Tokyo, whatever. By the 1980s, this is worth hundreds of times what you paid for it. And if you are a company, you can use the land as collateral for extraordinarily favourable borrowing terms, right?
The every time land prices really swell, you see things like mortgage standards, the standards for mortgage writing weaken. You saw this both in Japan and the 1980s, you saw it in the UK immediately before the crash in 2008, that people will lend you more than the value of the asset you're using as collateral because they're so confident that the asset is going to go up in price anyway, that they're happy to do 125% mortgage or whatever.
So basically that connection between credit and land I think is enormously important. And it has an interesting macroeconomic effect, which is that land and credit have these sort of cycles where they roll together land prices rise, which releases the financial constraint on the people that own land and allows them to borrow more, which if you are in a sort of economic upswing can magnify things.
So you have this sort of effect of sort of vicious cycle. In some ways it can get out of hand as it did in Japan in the 1980s where it becomes vulnerable to any slowdown or change in the assessment of what the land will be worth in the future. You can see the credit dry up incredibly quickly, which is exactly what happened there.
So I think this is a story that people don't grasp quite enough. You can see it in the developing world when it comes to land titling. There's a famous experiment in Thailand in the 1980s that the World Bank did, which formed the basis of some of its work on land titling where they gave secure title to a series of Thai farmers and ensure that they had it and basically check what happened.
And effectively what happened is not only does productivity go up, not only are they able to access all sorts of things they previously weren't in terms of permits and sewers and electricity and all kinds of things, but they start to borrow far, far more to invest, which they can now do because they own the titles of the land. So I think that element of it is probably one of the least discussed, and I think it comes down to the attributes the land has, the other assets don't.
Ben: Is it possible that a bank will lend me lots of money against land rather than against say a car or a factory, but without the land attached?
Mike: The reason is that for the banker it's relatively easy to value and because it's extraordinarily long lived, it's not going anywhere. You don't have to rely on an understanding of the technology, you don't have to know anything about a given business. If the collateral is there in the form of land, then you've got something you're going to repossess. Unless you see a really sharp downturn in land prices, then there's always going to be something valuable there. They only can't take it away with them. It's always going to be sat there.
So I think this is a huge story. It's partly, again, because those subsidies and assistance programmes and all sorts of changes that happened in the 20th century that made housing a much bigger problem in a problem, a much bigger part of the banking system. But yeah, land and credit I think very intimately linked in a way that's not always well understood.
Ben: And I have another question for you, which is if you were, let's say you were trying to do a version of your book that wasn't the version you actually did, but was a Freakonomics Mike Bird explores how land affects things in ways you don't understand. So it's like the land economics version of freak economics. Do you think there are any good examples there? One that I often think about is a fun one to think about is that shopping malls or shopping centres, as we call them, offer have different rents per square foot to different shops. So they have shops that they reckon will bring in customers and they have shops that they reckon will generate high profits but not bring in customers. If they only exist, there're on their own the ones that bring in customers they call anchor tenants. And in the US it's like the big department stores in the uk they'll be like John Lewis will be a classic anchor tenant. People go there, but they don't actually make big profits, producer surplus, the anchor tenants.
And I think it's an interesting example of where the economics of land are either rents on bits of land being spilling over to each other, the uses of different bits of land spilling over to each other and the rents on them being effect to achieve that effectively. A shopping mall owner, the property company that owns a shopping mall is charging a land value tax on all these different companies. And it's an interesting feature that helps you understand if you understand all the economics of land is a big feature and also could potentially help you understand stuff like why did so many American high streets decline after the 1960s say, and shopping malls, which are basically just a high street, but one guy owns it and so it's all managed.
If you don't understand the land question, it's quite confusing why shopping malls, which are just high streets in a new less convenient location have taken over from high streets. But I think if you understand the land question, you realise, oh, the shopping mall has a single owner who can charge a lower rent to an anchor tenant to get the people in and then have a nice mix of shops rather than a hoteling situation where it's all one kind of shop, et cetera, et cetera. Do you think, are there any other free economic style insights that you can get from land like that one?
Mike: I actually love that case, by the way, and I think it's one of the really interesting things when I sort of think about whether I support land value taxes in general, and I think I am relatively supportive of land value taxes. This example of the problems that it causes when you have single ownership and the trade-offs there is one of the most interesting, I think, arguments less in favour of having land value taxes in general.
I guess on that basis, the two things I would use as sort of Freakonomics points, one of which is that I think land had an enormous impact that is almost completely forgotten in the American revolution. So one of the biggest tensions between British and American elites, these emerging American elite at the time is over the use of land and the ability to use it for lending and collateral. So you have all of these schemes in the 18th century and late 17th century to set up these private and public land banks.
So institutions that will lend money new currencies against land in the form of mortgages. And this is to try and allay what is a huge problem in colonial America of an actual shortage of cash, right? In the early days in colonial America, the shortage of cash is sort of ludicrous. They're trading in any sort of species that they can get their hands on, they'll trade in commodity for commodity. It's extraordinarily backwards in terms of a market system.
And they tried to remedy this with these land banks, which were constantly sort of whack-a-mole smothered by the British government, which still had the same much older attitude towards land ownership, which is that you can't just have guys lending money against land and then a banker gets to repossess it. You can't have the Earl of Norfolk, whoever that happens to be on any given year, mortgaging his entire estate and losing it to some Italian guy who's willing to lend him money that the single person's ownership of land is sort of subordinated to the family and the history of the place and all sorts of other things made it very different in the UK.
The other one that I'd used is during the land bubble in the 1980s in Japan, the way that this was to the benefit of the Yakuza, it was an enormous part of the growth of the Yakuza in the second half of the 20th century was around its ability to take a cut essentially to find any way of getting on the inside track of the boom in land prices.
So you see them moving into things like construction, of course, where they ended up owning a large portion of the construction companies, but their most profitable route was a thing. And I'm going to butcher this a little bit called jiageya, right? Which was essentially coercing, threatening, bullying, assaulting the owners who wouldn't give up pieces of land to the companies that wanted to possess it, for which they would take the cut of the sale price of the land often in the 5% region to the extent that you have some of these guys by the late 1980s who are like billionaires in dollars in 1980s, money, extraordinarily rich people who've gotten out of prison five years earlier managing to accumulate the equivalent of a billion in 1980s dollars simply through bullying people out of their houses in Tokyo. So yeah, that's one of the other fun ones that I think shows some of the extreme circumstances you can get in the most ridiculous moments when land prices really go ballistic.
Ben: I have one more classic one that may be familiar to people, but I think it's such a good one that it bears repeating, which is of course that many, many historical infrastructure expansions were funded by speculation on the land that would result, and it's still done today in certain places.
So if you are opening a new MTR station in Hong Kong, then they most likely will have either used compulsory purchase or careful slow buying up or something to get hold of the property around the new station, which will then go loads in value and they'll sell it off and then that money will then fund the infrastructure investment they did.
And this has been done in all sorts of crazy ways. For example, the ghost acres of the Midwest that were, everyone knew this was the best farming land that could ever be found in the entire world, but before railways had been built to them, and they would have to be incredibly long and expensive, obviously, given how far away it is from the American population centres at the time before the railways were built to them, all the crops would wither and die by the time they would get to the European markets that they were intended to go to. So it was all valueless land, and then the railways were built by buying land around where the railways would've gone or many of the railways were built. The Kansas Pacific Railroad was built this way and then selling land farmland, not because it makes the transport easier to go anywhere, but just because your grain can now go and be sold to all the overpopulated places in Europe that had famines all the time.
And this is how Chicago's tram network, the streetcar network expanded or how the metropolitan line expanded an incredibly resilient way and how Japanese railways build their private railways, build their new places now. But something where if you don't think about, okay, what's actually going on here? Then it becomes like, how can all these countries fund all this infrastructure? Where is it coming from? Well, it's coming from land value that you can just give out to the people who live around it, or you can try and use it to fund investments that benefit.
Mike: Absolutely. And the MTR has got to be the best example of that, right? I mean the MTR is like, I would encourage everyone here who isn't familiar with this to go and read as much of it as you can, but the MTR is borderline sort of a mall and housing company that happens to have these pipes connecting things that have trains in them underneath, right? The trains are so, such a fringe part of the actual financing of the company.
So you have this, it's the world working as it should really, I think, and it probably is made easier. Hong Kong has all sorts of problems because of the high land price policy stuff, but it does allow for this extraordinarily cheap functioning successful public transport model.
I think one of the main things that comes across for me when I was writing the book was just you can do sometimes very similar things where you're trying to use the value of land productively for its best use. And very small variations mean these are either enormously successful or total disasters, right? So exactly the example you use of the railways and land values in America during the late 19th century.
This is the cause of endless financial speculation and turmoil as well. These are enormously profitable, but if you're borrowing against the value of the land that you've got the uplift and you get it wrong in some way, these were the causes, I think 1873/1857, big sort of railway speculation elements, these bubbles, because you'd have the credit created around the land. That doesn't mean it's a bad idea to use the land value to try and finance the venture, but it is extraordinarily powerful in getting it right versus getting it wrong. Matters enormously.
Sam: Well, Mike, thank you very much for joining us. If you want to hear more from Mike, you can buy his book, the Land Trap, which comes out in November. But is it available for pre-order now? And if you want to read more from us, you can go to worksinprogress.co. Thanks for listening.
Thumbnail includes: collage using “Longji Terraces” (modified — colors/cropping). Image “Longji Terraces” © Dariusz Jemielniak (Pundit), CC BY-SA 3.0 — https://creativecommons.org/licenses/by-sa/3.0/
Share this post