The Return of Land Prices  

Classical economics had three factors of production—labor, capital, and land. Contemporary economists normally treat land as simply a form of capital. This is mostly the pattern Thomas Piketty follows in his important new book Capital in the 21st Century. But as Karl Smith writes, many of Piketty’s findings about “capital” seem like they may mostly be findings about land.

I think I can make the point clearer than Smith does with two charts. First, here’s Piketty’s black-and-white chart depicting the evolution of capital in France:

Now here’s me using the same data, but ignoring foreign capital, using colors, and rearranging the order of the stack:

In the first chart you see the U-shaped story of inequality. The ratio of capital to income used to be very high, then you had the midcentury compression, and now you have a return of capital. In the second chart, you see that “other capital” has actually been fairly constant throughout this period. The compression is a collapse in the value of agricultural land. The return of capital is a massive increase in the value of residential housing.

So an interesting analytical question becomes this: Have these French houses become so valuable because the structures themselves are so grand (giant mansions, expensive building materials) or are they expensive because Paris and select upscale suburban communities are so pricey and desirable. I don’t have comprehensive data on French real estate. But certainly Paris is an extremely desirable, extremely expensive city. And I think that’s a large part of the story here. In the 19th century, you had wealthy landowners who owned vast tracts of rural land. In the 21st century, wealthy landowners own substantially smaller—but more expensive—swathes or urban or suburban land in Paris or greater London or Manhattan or coastal California.