10. Misallocating capital has much the the same economic effects as lowering the aggregate supply. Whenever capital is drawn into "hard" forms, with slow payout periods, there is the danger of its freezing up in an episodic "glitch," or credit crunch, in which case its value is lost. It becomes unrecoverable, which is the same as consuming or otherwise destroying it. Artificially raising demand for capital, leading it into wasteful, low-productivity uses, has similar effects. Overpricing land leads investors to overallocate capital to substitute for land. This takes several forms. A good single word covering that thought is "MALINVESTMENT", a term used by "Austrian School" economists today. Tragically, those who rally today under the label "Austrian" err seriously by attributing malinvesting solely to central bank policies, sweeping away and ignoring all other factors.
IMPLICATIONS.
A. Heavy taxation of land, precluding overpricing, should prevent overallocation of capital to land substitution.
11. Taxing anything except land (e.g. retail sales, labor income, value-added) will sterilize marginal lands (and marginal activity on all lands). Thus, non-land taxes abort investment outlets, demand for capital, hence capital formation.
Part 2 of "Land Boom, Capital Stretchout, and Banking Collapse
MALINVESTING CAPITAL DUE TO OVERPRICING LAND
Mason Gaffney
John Stuart Mill long ago pointed out that the level of rents and wages determines the structure and character of capital. High wages evoke labor-saving capital; high rents evoke land-saving capital.
In addition, high land prices induce owners to withdraw equity, and that consumes capital. When assets appreciate, the owners regard that as current income, most of which they will consume. Selling the assets may be part of that process, but the process also occurs silently without a sale: they might just borrow on the assets instead. Even more silently, they let the capital run down without replacement, "eating the seed corn", letting the rise of the underlying land value serve in lieu of a proper CCA (Capital Consumption Allowance).
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