Naked Capitalism on how land has all but disappeared from recent-ish economic theory.

Today’s economics textbooks – in particular microeconomics – slavishly follow the tenets of marginal productivity theory. ‘Income’ is understood narrowly as a reward for one’s contribution to production whilst wealth is understood as ‘savings’ due to one’s productive investment effort, not as unearned windfalls from being the owner of land or other naturally scarce sources of value. In many advanced economies land values – and capital gains made from increasing property prices – are not properly measured and tracked over time. As Steve Roth has noted for Evonomics, the U.S.’ National accounts does not properly take in to account capital gains and changes in household’s ‘net worth’, much of which is driven by changes in land values.

Even progressive economists such as Thomas Piketty have fallen in to this trap. Once you strip out capital gains (mainly on housing), Piketty’s spectacular rise in the wealth-to-income ratio recorded in advanced economics in the last 30 years starts to look very ordinary (Figure 1 shows the comparison for great Britain since 1970).

In the UK, land is not included as a distinct asset class in the National Accounts, despite being one of the largest and most important asset classes in the economy. Instead, the value of the underlying land is included in the value of dwellings and other buildings and structures, which are classed as ‘produced non-financial assets’ (Figure 2)

As shown in Figure 2, the value of ‘dwellings’ (homes and the land underneath them) has increased by four times (or 400%) between 1995 and 2015, from £1.2 trillion to £5.5 trillion, largely due to increases in house prices rather than a change in the volume of dwellings. In contrast the forms of ‘capital’ that we associate with increases in wealth and productivity – commercial buildings, machinery, transport, Information and communications technology has grown much more slowly. 

My emphasis.