Activities

1. The Effects of Land Speculation

Land rents and prices rise at a faster rate than general economic growth, because of two unavoidable facts:

1. Land is fixed in supply.
2. Land is needed for all production.

When sufficient numbers of workers and capitalists cannot afford to produce at the higher rents brought about by growth and speculation, production begins to stop.

Let us examine some of the implications of this fact for modern economies:

New Construction is Limited. If builders must pay too much for building sites, it takes from their profit by raising their costs. Their profit on investing in the building itself is what stimulates investing, which in turn is what makes jobs and incomes.

Business Costs Go Up. Businesses that rent their premises also get squeezed by rising rents. Here's an example: A merchant goes into a new shopping center with a long term lease. His rent is often too high, but he pays it to hold his position for the later term when he hopes the rent will be a bargain. Landlords writing long-term leases get used to this, and hold out for high rentals.

Nonproductive Investments Become More Profitable than Productive Ones. Those who already own land that they might improve are squeezed, by the higher opportunity cost of the land. They have the option of selling the land to a speculator.... Landowners will "site-sit" and wait, if they believe future development will be much more gainful than development for the current market. When the workaday facts of today begin looking dull and prosaic next to the gleaming expectations of tomorrow, look out.

Banking and Credit is Destabilized. Builders needing land borrow to buy it, even though the price is too high, gambling that future rises in rents will let them repay the loan. If these rent rises fail to happen, they go bankrupt. Their buildings are not destroyed, but the capital they used to build on them was misdirected, so much of it is economically lost: the buildings lose their market value.

Please answer the following questions.

1. Why does land value always tend to rise in a growing economy?
2. If land values were not expected to increase, how would that change things for businesses that rent their locations?
3. How does land speculation lead to fewer and smaller new buildings?
4. If land values increase when the economy is growing, what would tend to happen to them in a recession?
5. What does the author mean by "non-productive investments"?

2. Interpreting a Cartoon

Please answer the following questions:

1. Where do you think this man is going?
2. Why is he walking past all that land that is for sale?
3. If he is looking for work, why do you think he would be walking away from the city?
4. What would be a good caption for this cartoon?

3.

All right, now we're getting serious. We've made a commitment to growth, and we've decided to keep $2 worth of capital on hand for ever dollar of sales. We have to invest $10 every quarter just to keep our equipment from breaking down: that is our depreciation rate. This exercise illustrates how the accelerator principle contributes to business-cycle trends.

Quarter	Sales	Capital value	Depreciation	Gross (additional) investment
1st '01	500	1,000	10	10
2nd '01	600	1,200	10	210
3rd '01	700	1,400	10	210
4th '01	900	.	10	.
1st '02	1,000	.	10	.
2nd '02	800	.	10	.

Please fill in the rest of the chart, and then answer the following questions:

1. When was capital investment at its highest? At its lowest?
2. What does the chart tell us about the relationship between sales and capital spending?
3. If our increased sales lead us to buy more from our suppliers, what do you suppose their sales charts look like?
4. What would happen to our suppliers' sales if our investment declines?
5. Do you think a decrease in sales will always happen, sooner or later? Explain your answer.