Lee Friday – April 10, 2017
Property owners sitting on vacant land in London can apply for a partial rebate on their property taxes. City council may soon put an end to this practice. The London Free Press (March 23, 2017) quotes Councillor Stephen Turner: “The policy benefits land speculators, those who buy land to sit on it, and hurts development . . . It seems it’s being abused by land speculators . . . We want to offer incentives to develop, not disincentives . . . If someone has been holding on to a vacant building since 1998, they are clearly speculators. That decreases development potential . . .”
Politicians constantly vilify “speculators.” This is the word they often use when they want to blame someone for some perceived economic problem – or when they need a scapegoat for a real economic problem created by previous government policies.
We are all speculators. Each of us makes decisions on a regular basis, the outcomes of which are often unknown to us until some future time. This means we are speculating. My wife and I decide to dine at a restaurant that is new to us. We are not sure if we will enjoy it. We may be disappointed. We are speculating.
When entrepreneurs initiate new projects, they do not know if they will be successful. There are many unknown factors awaiting them, not the least of which is the fickle, discriminating consumer. Entrepreneurs are speculating, in the purest sense of the word, and most new businesses fail within five years. Our standard of living i.e. the goods and services we enjoy in modern society, are an outcome of successful entrepreneurial efforts. These speculators should be praised, not condemned. As Ludwig von Mises, one of the top two economists of the 20th century, wrote:
. . . dealing with the uncertain conditions of the unknown future – that is, speculation – is inherent in every action, and . . . profit and loss are necessary features of acting which cannot be conjured away by any wishful thinking.
Councillor Turner seems concerned that long-term owners of idle land (or buildings) are “decreasing development potential”, and to address this perceived deficiency, he proposes to increase taxes.
First, increasing taxes is not an incentive to development, but a disincentive. Owners are not holding on to idle properties because of tax rebates. They are keeping these properties idle because they have not yet identified a development project which they believe will be sufficiently profitable to justify the cost of development which they must obviously absorb. The risk of loss is always present. Profits, or losses, determine the success, or failure, of any business. As Mises said, this reality “cannot be conjured away by any wishful thinking.” This is a basic economic concept which Turner needs to learn.
Owners hold idle property because (a) they are confident an attractive opportunity will present itself in the future, and/or (b) they have not received an offer for the property which is sufficiently attractive for them to forego the opportunity for future development themselves. The fact they have not received such an offer indicates that other entrepreneurs do not have any better ideas.
Second, what does Turner know about “development potential”? Councillor Tanya Park made a similar comment on the same topic several weeks ago. “The earning potential is huge”, she said, which elicited my response. Is Turner aware of a particular project which would be profitable? If so, he should make a compelling offer to a landowner with his own money, and start his own business, instead of trying to force landowners into decisions which do not serve the interests of landowners or consumers. As Murray Rothbard, also one of the top two economists of the 20th century, wrote:
In many cases . . . a land site, once committed to a certain line of production, could not easily or without substantial cost be shifted to another line. Where the landowner anticipates that a better line of use will soon become available or is in doubt on the best commitment for the land, he will withhold the land site from use if his saving in “change-over cost” will be greater than his opportunity cost of waiting and of forgoing presently obtainable rents. The speculative site-owner is, then, performing a great service to consumers and to the market in not committing the land to a poorer productive use. By waiting to place the land in a superior productive use, he is allocating the land to the uses most desired by the consumers.
Rothbard is correct, but politicians are always eager to interfere with the functioning of the free market, because they always want to be seen doing something. It does not matter if the something is really beneficial to the public. All that matters is that politicians say the public will benefit. The general public cannot trace the effects of most political actions – thus, most people do not perceive that many economic hardships are a result of these actions.
I hope Councillor Turner reads this and learns a valuable economic lesson. Whether he is inclined, or not, to buy vacant land and put it into production personally, perhaps he will be inclined to support a policy of less government spending, and more tax reductions, not tax increases – for all properties. It is always economically beneficial to take less money out of the pockets of speculators i.e. consumers, entrepreneurs, and landowners.
I encourage Councillor Turner to set an example for other politicians. Say “yes” to market speculators. Say “no” to political manipulators.