Abstract
Here the whole argument will be pulled together, developing a picture of a cyclical pattern of interaction between the real and financial sides of the economy, drawing on an unstable money supply system, most likely culminating in a crash. The cycle is sketched, showing the forces that generate an expansion, then the upturn of financial speculation, leading to excess, followed by the changes that bring about a downturn and a crash. The role of rent-based securities in the cycle is surprisingly important, and has not previously received the attention it deserves.
How speculative rent checks production may be seen not only in the valuable land withheld from use, but in the paroxysms of industrial depression which, originating in the speculative advance in land values, propagate themselves over the whole civilized world, everywhere paralyzing industry, and causing more waste and probably more suffering than would a general war. Taxation which would take rent for public uses would prevent all this.
—Henry George
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This implies a valuation ratio above unity, Q > 1, which in conventional theory should lead to higher investment. But that theory was based on the idea that Q > 1 reflected higher expectation of profits in the future—raising equity prices—whereas in the circumstances described here the higher valuation ratio reflects the working of destabilizing processes. If Q > 1 did lead to higher investment, this would strengthen the boom and tend to keep Q from rising so much, or at least not as fast. It would be quite possible to imagine real investment tracking the changes in Q, lagging behind by a period. However, there are other important influences on real investment besides Q, chiefly the expected growth of markets—which will be hampered by the growth of inequality.
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Nell, E J and Errouaki, K. (2013) Rational Econometric Man. Cheltenham: Edward Elgar.
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Nell, E. (2019). Rents and the Securities Markets. In: Henry George and How Growth in Real Estate Contributes to Inequality and Financial Instability . Palgrave Studies on Henry George for the 21st Century. Palgrave Pivot, Cham. https://doi.org/10.1007/978-3-030-18663-0_10
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