When governments allow the unearned value of land to flow to private hands, this acts as a barrier to economic activity, health and growth.
Land values generally rise over time, as a result of population and economic growth. When there is an expectation that land values will continuously rise, land buyers become willing to pay more than the real value of land, so that they have the opportunity to make gains from future land price rises. This is known as the speculative premium on land prices, and forms the difference between land value and land price. Land value is what land is worth, in terms of its productive capacity and locational advantages, while land prices are what people are willing to pay for land.
Every dollar of the speculative premium on land prices is a dollar that workers and businesses must pay for homes and commercial premises. This land speculation acts like a brick wall in front of economic activity. Land speculation causes land bubbles (often referred to as ‘housing’ or ‘property’ bubbles), as land prices rise far beyond the value of land.
In addition to increased land costs, when land value gains are allowed to flow into landowner’s hands, rather than be used as government revenue, workers and businesses must pay taxes on their incomes, further acting as a brick wall to economic growth.
Rising productivity and good economic growth in an economy will just cause an economy with privatized land rent to run into the brick wall faster. Eventually, the economy crashes into the brick wall – land prices just become too much of a drag on the economy. This is the root cause of the business cycle, of economic booms and economic recessions and depressions.