Academic journal article The American Journal of Economics and Sociology

The Henry George Theorem and the Entrepreneurial Process: Turning Henry George on His Head

Academic journal article The American Journal of Economics and Sociology

The Henry George Theorem and the Entrepreneurial Process: Turning Henry George on His Head

Article excerpt

I

Introduction

There is hardly a major real estate developer who does not understand the basic mechanisms of the Henry George Theorem (HGT). Even the real estate brokers who earn commissions know that when it comes to valuing some parcel of land, it is the location of that parcel that drives a major part of its market value. By location they mean proximity to schools, fire departments and, most importantly, to central business districts (CBDs). It is a brute fact about the real world that 'economic activity tends to concentrate geographically' (Hanson 2000: 477; Scott 2005). An agglomeration of activity attracts large numbers of people to that area.

In Massachusetts, U.S.A., there are no fewer than 350 towns and cites. Each has its own CBD and sometimes several. Also, each town or city has its own local government, fire service department, police, schools and the myriad licensing departments that provide public access to the otherwise private plans and goals of the local real estate developers.

Homeowners know in their bones that a successful 'improvement', such as an elegant pedestrian mall lit by modern street lamps and designed by a noted architect, will bring higher resale values for their homes. They also know that such improvements are costly and must be paid for somehow. They worry that future real estate assessments (and later taxes) will rise. (1) Local business owners know that a tasteful lit market place with ample parking access translates mightily into large sales and profits. There is nothing that piques a local community's interest more than a real estate deal just a block or two from its homes and businesses.

These financial implications, coupled with a genuine interest in their community and what they leave behind for the next generation, make local town politics important to many people.

I am tempted to write that, just as 'all politics is local,' all local politics involves real estate deals, but that would be overstating matters a great deal. The famed economist Joseph Schumpeter noted in 1911 that economic development involved novelty. New combinations of commodities pioneered by energetic entrepreneurs and subsequently adopted by hoards of imitators are what characterized the entrepreneurial process (Schumpeter 1961 [1911]: 65-68). Schumpeter would, have included under his label 'new combinations' different combinations of product characteristics under brand names, and a great many other activities as well. Reflecting the colonial venturing of his day, Schumpeter included the discovery of new resources and materials and the structural organization or reorganization of industry as examples of 'new combinations'. He did not mention real estate but I think that when the real estate developers pioneer new combinations of property rights they are quintessential entrepreneurs in Schumpeter's sense of the term.

The purpose of this chapter is to make a case for the importance of the HGT, not only as an abstract theorem in urban economics (which it most certainly is), but also as a catalyst in the 'story-telling' that is an essential part of understanding the entrepreneurial process. The implications of the HGT are used to help illuminate patterns of behaviour that are observable in the market place, in the local community, and in real estate markets where claims to real property are traded under competitive conditions. In my view, the whole purpose of economic reasoning is to make the world understandable in terms of human action. As with many, if not all, economic models, the point of the exercise is to provide the social scientist with basic insights about processes at work in the real world. The theorem itself, as I shall explain in section 4 below, can help focus the mind on characteristics and features of the entrepreneurial process around us. In the next section, I shall say something about the historical Henry George, who did not hold real estate owners in high regard. …

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