1 00:00:00,490 --> 00:00:03,430 Hi, welcome to the Works in Progress podcast. My name's Sam Bowman. 2 00:00:03,430 --> 00:00:04,990 I'm one of the editors at Works in Progress. 3 00:00:05,450 --> 00:00:07,910 And I'm Ben Southwood, another editor at Works in Progress. 4 00:00:08,240 --> 00:00:12,150 We're joined today by Mike Bird. Mike is Wall Street editor at The Economist. 5 00:00:12,490 --> 00:00:16,390 He also hosts their Excellent Money Talks podcast and he's the author of the 6 00:00:16,390 --> 00:00:19,830 forthcoming book, The Land Trap: the History of the World's Oldest Asset. 7 00:00:20,830 --> 00:00:22,200 So what is this book about Mike? 8 00:00:23,490 --> 00:00:27,230 So this book is basically something that I've been thinking about for years, 9 00:00:27,910 --> 00:00:30,710 particularly living in Hong Kong and Singapore, 10 00:00:30,730 --> 00:00:35,510 but also you guys know I've been interested in land and housing issues before 11 00:00:35,530 --> 00:00:37,270 then. When I was living in London, 12 00:00:38,260 --> 00:00:42,950 what I wanted to do was look at land from the sort of financial 13 00:00:42,960 --> 00:00:46,870 asset side of things. I always think about land as it's got the land use, 14 00:00:47,650 --> 00:00:51,710 the actual material sort of use of land, 15 00:00:52,880 --> 00:00:57,270 which I think is very well covered by you guys and a number of other people. 16 00:00:58,270 --> 00:01:02,830 I think what you probably read less about is land and its development as a 17 00:01:02,830 --> 00:01:07,270 financial asset. I started out with a few sort of theses about this book, 18 00:01:08,080 --> 00:01:10,430 mostly about Hong Kong and Singapore and Asia, 19 00:01:10,850 --> 00:01:15,650 and sort of got down to brass tacks over time and decided 20 00:01:15,650 --> 00:01:19,890 this was a story that most people hadn't heard about. It starts 300/400 years 21 00:01:19,940 --> 00:01:24,850 ago in colonial America with these struggles to 22 00:01:25,350 --> 00:01:27,610 use land properly as a financial asset, 23 00:01:28,260 --> 00:01:32,810 which a lot of colonists to then Colonial America subsequently the US 24 00:01:33,570 --> 00:01:34,403 struggle with. 25 00:01:35,250 --> 00:01:38,970 I think it's an enormously important asset for all sorts of reasons that 26 00:01:38,970 --> 00:01:43,770 intersect with housing. It's a huge driver of inequality. 27 00:01:43,800 --> 00:01:45,610 There's huge amount of credit 28 00:01:47,210 --> 00:01:49,410 attached to land in the form of mortgages. In fact, 29 00:01:50,470 --> 00:01:55,170 lion's share of bank credit works that way and in Asia it's been 30 00:01:55,330 --> 00:01:57,530 enormously important to the sort of development story. 31 00:01:57,990 --> 00:02:01,170 So that's in Hong Kong and Singapore, but also in Japan, 32 00:02:01,670 --> 00:02:05,210 in mainland China, in Taiwan, all over the place. 33 00:02:05,310 --> 00:02:07,050 You see these land related stories, 34 00:02:07,150 --> 00:02:11,530 how land has been used both well and sometimes poorly to 35 00:02:12,190 --> 00:02:13,320 aid in development. 36 00:02:13,600 --> 00:02:16,600 I wanted to write something that sort of covered all of these things and over 37 00:02:16,600 --> 00:02:21,450 time it broadened out into this sort of hopefully general financial history of 38 00:02:22,040 --> 00:02:26,490 land and why it matters so much both through history and why it matters so much 39 00:02:26,510 --> 00:02:27,340 now. 40 00:02:27,340 --> 00:02:29,390 Does it have a boiled down, 41 00:02:30,370 --> 00:02:32,990 if you were trying to summarise it in one line for the Economist, 42 00:02:34,060 --> 00:02:36,750 does it have a thesis that you could summarise? 43 00:02:36,760 --> 00:02:40,820 Is it just land is very important or is there something deeper than that? 44 00:02:41,710 --> 00:02:44,750 I think land is very important, is probably the right way of framing it. 45 00:02:45,430 --> 00:02:48,390 I think it's very important in lots of ways that you don't understand. 46 00:02:48,700 --> 00:02:50,750 There's lots of, I'd say 47 00:02:53,010 --> 00:02:56,950 there's lots of things that happen in the world that you wouldn't associate as 48 00:02:56,950 --> 00:02:59,570 being to do with land or having a land related element, 49 00:03:00,380 --> 00:03:02,450 which actually have a huge land related element. 50 00:03:03,260 --> 00:03:06,570 One of the people who I sent it to have a look at, 51 00:03:06,720 --> 00:03:09,010 he's a friend and also an author, 52 00:03:09,560 --> 00:03:13,530 Matt Campbell said it was really a sort of history of the modern world told 53 00:03:13,530 --> 00:03:17,250 through the lens of land, which I think is a nice way of putting it. 54 00:03:18,130 --> 00:03:20,340 Because you mentioned Singapore and Hong Kong. 55 00:03:20,420 --> 00:03:23,260 I want to talk about something that served particular interest to me, 56 00:03:23,260 --> 00:03:25,540 which is different kinds of land ownership. 57 00:03:25,880 --> 00:03:30,780 So nowadays in the UK in particular, but I think around the world, the US etc, 58 00:03:31,080 --> 00:03:34,620 we mostly think about standard freehold land ownership, 59 00:03:34,990 --> 00:03:39,380 which essentially you kind of own basically the land and everything under it, 60 00:03:39,380 --> 00:03:43,460 usually going down pretty much to the earth's core and you own it with no 61 00:03:43,460 --> 00:03:44,293 respect to anyone else. 62 00:03:45,130 --> 00:03:49,220 Sometimes you have property tax or something that you have to pay and sometimes 63 00:03:49,480 --> 00:03:51,380 if you want to extract minerals out of it you've got to pay someone, 64 00:03:51,480 --> 00:03:55,660 but essentially you own it and all of every bundle of rights with respect to it, 65 00:03:56,520 --> 00:03:57,353 you pretty much own. 66 00:03:57,520 --> 00:04:02,180 But as we have learned from previous guests on this podcast and 67 00:04:02,330 --> 00:04:06,180 also I've read about, so Hong Kong and Singapore still have leasehold, 68 00:04:06,400 --> 00:04:10,740 so they still have a kind of feudal tenure where people kind of own it. 69 00:04:10,740 --> 00:04:14,100 You give them the right to occupy and use a piece of your land for a given 70 00:04:14,100 --> 00:04:14,880 amount of time, 71 00:04:14,880 --> 00:04:17,580 but at the end they give it back and this is existed in lots of countries, 72 00:04:17,580 --> 00:04:20,260 but in Singapore and Hong Kong, this is still a major thing, right. 73 00:04:20,800 --> 00:04:21,850 Totally. Yeah, 74 00:04:21,990 --> 00:04:25,050 and I think it gets to something even deeper than that when we talk about 75 00:04:25,060 --> 00:04:29,010 leasehold and freehold is one of the things I think people don't always grasp 76 00:04:29,010 --> 00:04:32,050 about land. So people like us often talk about there being 77 00:04:34,170 --> 00:04:36,370 features that land has that other assets don't have. 78 00:04:36,920 --> 00:04:40,210 It's difficult to create more land, it's difficult to move land around, 79 00:04:40,210 --> 00:04:43,610 but one of the other ones is that it's extraordinarily long lived, right? 80 00:04:43,790 --> 00:04:48,610 If you think about almost any other kind of capital investment in machinery or 81 00:04:48,650 --> 00:04:53,610 intellectual property or really anything either physical or intangible, 82 00:04:53,940 --> 00:04:58,290 these things age they depreciate land doesn't really depreciate. 83 00:04:58,710 --> 00:05:01,130 So I think that's an important thing and when we talk about freehold and 84 00:05:01,130 --> 00:05:04,050 leasehold, you can own a company for a thousand years, 85 00:05:04,070 --> 00:05:05,170 but if the company doesn't change, 86 00:05:05,350 --> 00:05:08,810 it will be worthless at some point much sooner than that. 87 00:05:09,190 --> 00:05:12,690 That's not necessarily true with land, obviously depending on where it is now, 88 00:05:13,290 --> 00:05:18,170 Singapore and Hong Kong both have their leasehold tradition originating 89 00:05:18,170 --> 00:05:21,400 in the same place. They're both British colonies, 90 00:05:21,880 --> 00:05:23,770 British trading ports, 91 00:05:24,230 --> 00:05:28,530 and that's the history of the leasehold and basically the British 92 00:05:29,190 --> 00:05:33,010 War and Colonial office starts funding those places, 93 00:05:33,180 --> 00:05:37,730 these new crown colonies through land sales land auctions, 94 00:05:38,420 --> 00:05:43,130 which in the early 19th century is an extremely good way of 95 00:05:43,200 --> 00:05:47,490 funding port a trading city. 96 00:05:48,070 --> 00:05:52,490 You have merchants who want to use the space on your 97 00:05:52,600 --> 00:05:56,930 islands as go downs or for warehouses of all types, 98 00:05:57,150 --> 00:05:58,090 all sorts of other things. 99 00:05:58,710 --> 00:06:02,730 You don't need to tax them with an income tax or any sort of sales tax, 100 00:06:02,740 --> 00:06:04,730 which would be difficult to administer. 101 00:06:05,110 --> 00:06:07,450 People would get around it and if it was too high, 102 00:06:07,450 --> 00:06:11,610 they'd find somewhere else to do their work and somewhere else to be based. 103 00:06:11,870 --> 00:06:13,170 But with the land sales, 104 00:06:13,430 --> 00:06:18,090 you can pretty much guarantee who is operating on a given portion of land. 105 00:06:18,090 --> 00:06:20,960 These aren't big places. You just need a sort of 106 00:06:22,890 --> 00:06:26,370 a map and a series of people to administer where the sales are being made. So 107 00:06:26,370 --> 00:06:29,890 it's administratively simple. The better the city does, 108 00:06:30,230 --> 00:06:32,170 the more you can make from these land sales. 109 00:06:33,030 --> 00:06:36,330 So basically these things fit extremely well and Stanford Raffles, 110 00:06:36,360 --> 00:06:38,130 when he gets to Singapore, 111 00:06:39,000 --> 00:06:43,210 he's basically responsible for instituting this system through the East India 112 00:06:43,210 --> 00:06:45,810 company. He's sort of obsessive of this. 113 00:06:45,920 --> 00:06:50,890 He's tried it in the very early 19th century in Java already where it was a 114 00:06:50,890 --> 00:06:52,130 sort of catastrophic failure, 115 00:06:52,510 --> 00:06:57,090 but he tried his best to make this system work of land sales and he had this 116 00:06:57,150 --> 00:07:02,050 idea that the land sales wouldn't just be a good way of raising revenue, 117 00:07:02,230 --> 00:07:07,050 but they'd break these sort of feudal social structure of some of these 118 00:07:07,050 --> 00:07:10,130 places, which I think he basically gets from Adam Smith. 119 00:07:10,200 --> 00:07:13,850 It's not enormously clear through his memoirs where he's getting these ideas, 120 00:07:13,910 --> 00:07:16,290 but he was a big fan of Adam Smith. Adam Smith, 121 00:07:16,290 --> 00:07:20,970 obviously a sort of land tax advocate. Basically Singapore and Hong Kong 122 00:07:21,140 --> 00:07:25,250 still have that residue from the early 19th century. 123 00:07:25,960 --> 00:07:28,170 Hong Kong didn't become independent. 124 00:07:28,170 --> 00:07:32,530 He was still administered by the UK and now administered by the People's 125 00:07:32,650 --> 00:07:33,483 Republic of China. 126 00:07:33,890 --> 00:07:37,410 Singapore became independent and hung on to the system in large part because it 127 00:07:37,410 --> 00:07:41,890 worked very well for them and also I think because it was the government rather 128 00:07:41,890 --> 00:07:45,250 than some other landowner that was the primary beneficiary from this. 129 00:07:45,250 --> 00:07:47,050 Since the end of the WW2, 130 00:07:47,050 --> 00:07:50,970 they've really headed off in different directions that we can talk about a bit. 131 00:07:50,990 --> 00:07:51,790 But yeah, 132 00:07:51,790 --> 00:07:55,610 the fact that they've retained it I think is down to those original British 133 00:07:55,970 --> 00:07:59,090 colonial roots as port cities basically. 134 00:07:59,680 --> 00:08:03,370 What is it that gives the land value originally before 135 00:08:04,210 --> 00:08:06,090 settlers, a colonists have arrived there, 136 00:08:06,790 --> 00:08:09,410 why would they want to buy land and go there in the first place? 137 00:08:10,240 --> 00:08:14,850 Sure. So like Raffles and the founders of Hong Kong made them free ports, right? 138 00:08:15,230 --> 00:08:18,290 So nobody's going to tax you on the way in or out. 139 00:08:18,310 --> 00:08:20,370 You can trade very freely from these places. 140 00:08:20,640 --> 00:08:25,410 It's under the auspices of in Singapore of the East India 141 00:08:25,450 --> 00:08:26,930 company is a sort of protector. 142 00:08:27,310 --> 00:08:32,250 So basically the propensity of people to turn up in these places and start 143 00:08:32,250 --> 00:08:36,450 establishing operations to start trying to trade is enormous. And in fact, 144 00:08:36,450 --> 00:08:38,090 if you read through the 145 00:08:40,160 --> 00:08:44,680 memoirs and the papers written by the people who were the original colonists in 146 00:08:44,680 --> 00:08:47,850 these places, your Pottingers, your Raffleses, 147 00:08:48,360 --> 00:08:51,530 they're constantly surprised by how quickly people turn up, 148 00:08:51,850 --> 00:08:55,510 particularly people from the southern Chinese coast who just the second you say, 149 00:08:55,590 --> 00:08:56,800 I'm setting up a Freeport, 150 00:08:57,000 --> 00:08:59,330 they're on the junk boats and they're heading towards you. 151 00:08:59,710 --> 00:09:03,010 It was a sort of immediate thing where there's this constant level of surprise 152 00:09:03,470 --> 00:09:05,410 how rapidly the population rises, 153 00:09:05,880 --> 00:09:09,130 basically anywhere you set up a Freeport in that part of the world because taxes 154 00:09:09,130 --> 00:09:13,040 elsewhere, pretty onerous governing systems are pretty poor. So it, 155 00:09:13,040 --> 00:09:16,450 it's enormously advantageous if you're a merchant in that part of the world. 156 00:09:17,390 --> 00:09:22,040 And so the people buying the land are locals or from 157 00:09:22,140 --> 00:09:26,570 China and Southeast Asia or are they from Britain in this case or 158 00:09:27,150 --> 00:09:28,090 are they from Europe. 159 00:09:28,790 --> 00:09:30,610 Initially? They're mostly from Europe. 160 00:09:30,640 --> 00:09:34,970 There's a few people who sort of specialised in trading in what would've then 161 00:09:34,970 --> 00:09:35,803 been the near East. 162 00:09:36,360 --> 00:09:40,170 They're mostly British companies and they're mostly the old sort of in Hong Kong 163 00:09:40,230 --> 00:09:45,090 you have the first land auctions, really the Hongs that we now know, 164 00:09:45,090 --> 00:09:48,680 and some of these companies are still going like Charlie Matheson, Swire, 165 00:09:49,470 --> 00:09:52,040 big East Asian trading companies, British and origin, 166 00:09:52,470 --> 00:09:56,570 but run by families that have been in that part of the world for centuries where 167 00:09:56,570 --> 00:10:00,090 their real focus is on trade in and out of China. 168 00:10:00,660 --> 00:10:05,250 Those are the biggest purchases of land initially. And then as time goes on, 169 00:10:05,470 --> 00:10:09,490 you see local big companies emerging, 170 00:10:09,490 --> 00:10:11,920 particularly in Hong Kong in the middle of the 20th century, 171 00:10:11,950 --> 00:10:16,850 you see this huge transfer of business activity going into 172 00:10:16,850 --> 00:10:21,450 the sort of ethnically Chinese Hong Kong businesses. So that changed enormously. 173 00:10:21,450 --> 00:10:23,770 Mostly it's British sort of traders to begin with. 174 00:10:24,420 --> 00:10:29,040 So these governments are selling leaseholds that is the right to occupy and use 175 00:10:29,040 --> 00:10:33,850 land for a period of time and pay a ground rent of what, 99 years or something. 176 00:10:33,850 --> 00:10:34,683 So 177 00:10:37,640 --> 00:10:42,490 will we see the original leases expire around the same time as handover or would 178 00:10:42,490 --> 00:10:44,890 they sell in for 10 years? What happens when the leases come back? 179 00:10:45,070 --> 00:10:49,730 Is there widespread acceptance that the government will resell the land on the 180 00:10:49,730 --> 00:10:53,450 best possible terms or are they expected to renew existing arrangements? 181 00:10:53,990 --> 00:10:56,930 And by the way, why did they do 99 years rather than 100? 182 00:10:57,040 --> 00:10:58,010 I've never understood that. 183 00:10:58,950 --> 00:10:59,783 You know what? 184 00:11:00,040 --> 00:11:04,010 I've not grasped why they did 99 years and rather than a hundred and in fact in 185 00:11:04,010 --> 00:11:07,250 Hong Kong you saw the leases change quite a bit, right? 186 00:11:07,430 --> 00:11:11,680 So the original instruction that goes out both in Singapore and Hong Kong is 187 00:11:11,680 --> 00:11:16,450 that the administrations are to basically sell land 188 00:11:16,510 --> 00:11:21,330 for as long as it takes for it to be productively used for people to invest in 189 00:11:21,330 --> 00:11:23,450 it and want to invest in it and make a profit, 190 00:11:23,870 --> 00:11:27,680 but basically no longer than that and people settle around 99 years. 191 00:11:27,680 --> 00:11:30,290 But there are some land leases in Calhoun, 192 00:11:30,330 --> 00:11:33,930 I think that were several hundred years. Some are short, it's 50. 193 00:11:34,750 --> 00:11:36,650 So people have sort of varied around a lot. 194 00:11:36,750 --> 00:11:41,010 I'm not exactly sure why 99 years ended up being landed on, but it did. 195 00:11:41,300 --> 00:11:44,210 The question of what happens when they're renewed is an interesting one, 196 00:11:44,210 --> 00:11:48,770 and I think it's one of the biggest criticisms of this model in general is that 197 00:11:48,830 --> 00:11:53,470 you come under significant political pressure as lots of leases are ending at 198 00:11:53,470 --> 00:11:56,030 the same time, particularly when it's residential housing, 199 00:11:56,590 --> 00:12:01,210 to basically just renew them for close to nothing for the people living in them. 200 00:12:01,650 --> 00:12:04,570 I should say in Singapore, the system's quite different. 201 00:12:04,570 --> 00:12:08,210 It's the one in Hong Kong now because of the way things have headed off in 202 00:12:08,370 --> 00:12:09,203 separate directions. 203 00:12:09,430 --> 00:12:12,800 So I think the best way to think about it is in Hong Kong by fiat, 204 00:12:12,800 --> 00:12:16,800 the government owns all the land At the time of independence in Singapore, 205 00:12:17,350 --> 00:12:22,170 the government owned a large amount of land but spent a long time acquiring land 206 00:12:22,430 --> 00:12:25,650 at wildly expro prices, 207 00:12:26,660 --> 00:12:31,370 incredibly low prices that the government was acquiring land for 208 00:12:31,550 --> 00:12:36,250 by fiat in Singapore and they used a large portion of that land 209 00:12:36,590 --> 00:12:41,130 for the housing and development board, which is to build this sort of unusual 210 00:12:44,040 --> 00:12:48,970 housing in Singapore. Singaporean own the leases for these, 211 00:12:49,300 --> 00:12:53,570 but they're extremely restricted in terms of what you can do with them from a 212 00:12:53,570 --> 00:12:57,850 western perspective. As a Singaporean, you can own one and only one. 213 00:12:59,030 --> 00:13:00,850 You have extremely 214 00:13:02,610 --> 00:13:07,250 generous terms in terms of getting a mortgage from the compulsory Provident fund 215 00:13:07,510 --> 00:13:11,800 in Singapore. But acquiring lots of properties in the private market 216 00:13:12,870 --> 00:13:15,050 by borrowing to get them is extremely difficult. 217 00:13:15,270 --> 00:13:19,650 The amount that a bank can lend you to buy a private property in Singapore is 218 00:13:19,650 --> 00:13:21,800 extraordinarily restricted, and as you buy more, 219 00:13:21,800 --> 00:13:24,970 it's even more and more restricted to the extent that if you're buying a fourth, 220 00:13:24,970 --> 00:13:26,930 you've basically got to pay up in cash. 221 00:13:27,230 --> 00:13:28,730 You effectively can't borrow to get this. 222 00:13:28,990 --> 00:13:31,680 So in Singapore they've used it very differently. 223 00:13:33,330 --> 00:13:34,820 They use that for all sorts of things. 224 00:13:35,160 --> 00:13:39,860 The fact that they have this system allows them to do this incredible management 225 00:13:40,080 --> 00:13:44,700 of individual estates where they determine the racial mix of a 226 00:13:45,380 --> 00:13:46,213 HDB estate. 227 00:13:46,880 --> 00:13:51,620 So if there's too many ethically Chinese or Tamil occupants of a given 228 00:13:51,620 --> 00:13:52,090 estate, 229 00:13:52,090 --> 00:13:56,180 they'll basically say to anyone selling on their HDB that it has to go to 230 00:13:56,180 --> 00:13:59,140 someone of one of the less represented races, 231 00:13:59,590 --> 00:14:02,620 which is sort of fascinating. Singaporean, 232 00:14:02,880 --> 00:14:07,580 the sort of cross between laissez fair and absolutely 233 00:14:07,580 --> 00:14:10,050 extraordinary social management that Singapore has, 234 00:14:10,180 --> 00:14:12,660 I find to be really interesting and unique, 235 00:14:12,660 --> 00:14:15,620 and I think that comes across in the way they use land quite a lot. 236 00:14:17,020 --> 00:14:21,560 So this model of selling leases to fund the 237 00:14:21,560 --> 00:14:26,240 ongoing expenses of a local government hasn't gone away because one of the 238 00:14:26,240 --> 00:14:30,280 things we've talked about from your book before that you've told me about is 239 00:14:30,280 --> 00:14:32,640 that this is how Chinese local government funds itself. 240 00:14:33,340 --> 00:14:36,320 Am I right in thinking that they sell 70 year leases to developers 241 00:14:38,180 --> 00:14:42,240 to fund how they worked? Can you tell me more about this? That's all I know. 242 00:14:43,160 --> 00:14:43,740 Absolutely. 243 00:14:43,740 --> 00:14:48,680 So basically this begins kicking off the seeds of this start in the 1980s, 244 00:14:48,680 --> 00:14:51,370 right? Deng Xiaoping is reforming China. 245 00:14:51,880 --> 00:14:56,290 He's doing this very steadily because the sort of political coalition building 246 00:14:56,710 --> 00:15:01,490 to go from a sort of command economy into a more market oriented 247 00:15:01,510 --> 00:15:04,290 one is difficult to build. He spends a long time doing this. 248 00:15:04,360 --> 00:15:09,090 There's a sort of grand irony in where the rules 249 00:15:09,200 --> 00:15:10,690 come from. So China, 250 00:15:10,690 --> 00:15:15,330 essentially Chinese reformers want to copy the model that Hong Kong has. 251 00:15:16,470 --> 00:15:19,330 So they want to use, 252 00:15:19,440 --> 00:15:24,130 they hear that Hong Kong owns a hundred percent of the land in 253 00:15:24,130 --> 00:15:27,170 Hong Kong and they lease it out to people. If you're a Chinese communist, 254 00:15:27,170 --> 00:15:29,610 this is understandably quite an appealing thing. 255 00:15:30,270 --> 00:15:33,530 So the communist constitution in China says that 256 00:15:35,030 --> 00:15:37,770 the state owns all the land, so no change required there. 257 00:15:38,150 --> 00:15:41,090 You just sell land use rights, you're not selling the land, 258 00:15:41,830 --> 00:15:45,930 so you get to keep parts of the existing system. So it's mostly 259 00:15:46,730 --> 00:15:48,370 copied from Hong Kong when it's adopted, 260 00:15:48,960 --> 00:15:52,250 it's adopted very steadily in the 1980s, you have these test cases. 261 00:15:52,570 --> 00:15:57,410 Shenzhen is the first place where there's a test case of auctioning land for use 262 00:15:57,410 --> 00:16:00,810 mostly by foreign manufacturers, foreign businesses. 263 00:16:01,080 --> 00:16:03,610 It's a way of raising enormous amounts of money, 264 00:16:04,060 --> 00:16:08,290 especially when you are otherwise quite worried about foreign capital, 265 00:16:08,360 --> 00:16:10,770 foreign investment, borrowing from foreigners. 266 00:16:10,770 --> 00:16:15,690 Certainly and effectively this system sort of starts to 267 00:16:15,690 --> 00:16:19,820 kick off late in the 1980s. What really fuels it, 268 00:16:19,910 --> 00:16:24,100 which I know you guys have written about before in works in progress is this 269 00:16:24,340 --> 00:16:27,660 1994 change to the Chinese tax law, 270 00:16:27,910 --> 00:16:29,980 which basically means that local governments, 271 00:16:29,980 --> 00:16:34,300 which previously had been responsible for a huge amount of the revenue 272 00:16:34,300 --> 00:16:38,900 accumulation and a huge amount to spending start to be responsible for the same 273 00:16:38,900 --> 00:16:39,740 amount of the spending, 274 00:16:39,880 --> 00:16:44,820 but all of the revenue that they make from ordinary tax routes goes to 275 00:16:44,820 --> 00:16:45,780 the central government first, 276 00:16:45,840 --> 00:16:50,260 and the central government decides then how much to reallocate to the local 277 00:16:50,260 --> 00:16:54,660 governments. So they're enormously s struck. This is a difference between, 278 00:16:54,980 --> 00:16:58,980 I think the region of it goes from 30, 279 00:16:59,160 --> 00:17:04,100 it goes from 70% of their spending being funded directly by their own taxes to 280 00:17:04,100 --> 00:17:07,260 30% overnight. It is a huge, huge change, 281 00:17:07,760 --> 00:17:12,180 and the way that they make up the difference here is with land sales, 282 00:17:12,180 --> 00:17:15,300 which don't count as the revenue that has to be remitted to the central 283 00:17:15,300 --> 00:17:17,970 government. So they're given this enormous incentive. 284 00:17:18,760 --> 00:17:22,700 The flip side of that is that Chinese households don't really have anything else 285 00:17:22,700 --> 00:17:23,700 good to invest in. 286 00:17:24,470 --> 00:17:28,700 You've got nothing that will provide either decent income or capital 287 00:17:28,700 --> 00:17:29,533 accumulation. 288 00:17:30,840 --> 00:17:35,300 Go and Google a chart of the Chinese stock market performance over the last 30 289 00:17:35,300 --> 00:17:35,690 years. 290 00:17:35,690 --> 00:17:39,730 It's amazing that you're in a country that has been growing at sort of seven 8% 291 00:17:39,970 --> 00:17:44,580 GDP per capita over that period that the stock market's done basically nothing. 292 00:17:45,230 --> 00:17:49,610 So anything else you invest in is going to be wheedled away by 293 00:17:49,640 --> 00:17:51,450 financial repression and all sorts of things. 294 00:17:51,450 --> 00:17:55,480 So there's enormous demand on the household side and enormous 295 00:17:56,370 --> 00:17:58,240 interest in supplying from the local governments, 296 00:17:58,240 --> 00:18:00,480 which is basically fueling the entire thing. 297 00:18:00,740 --> 00:18:02,770 But the grand irony in all of this I find, 298 00:18:02,830 --> 00:18:07,570 is that they're essentially taking the British War and colonial office model. 299 00:18:08,360 --> 00:18:12,810 They're taking what raffles brought to Singapore and what the administrators of 300 00:18:12,810 --> 00:18:14,570 Hong Kong brought from the uk. 301 00:18:15,050 --> 00:18:19,170 I think largely not very well known by the people implementing the system that 302 00:18:19,170 --> 00:18:23,960 they're pulling on a thread that goes all the way back to the management of the 303 00:18:23,960 --> 00:18:27,130 British Empire almost 200 years earlier. 304 00:18:27,830 --> 00:18:29,810 So I find that all really, really interesting. 305 00:18:30,910 --> 00:18:35,370 Is there a common thread as to why this is happening in Asia in particular? 306 00:18:36,510 --> 00:18:41,210 Is this like an Asian thing or is it just coincidence that this 307 00:18:41,210 --> 00:18:43,240 thread runs through all these different countries? 308 00:18:44,280 --> 00:18:49,180 So I think the answer to that, and I've been thinking about it for years now, 309 00:18:49,560 --> 00:18:51,490 why does this happen in Asia? 310 00:18:51,490 --> 00:18:55,940 And also if you look at house price to income ratios, 311 00:18:57,710 --> 00:19:02,340 there are some measures of this in cities across East Asia that are just 312 00:19:02,400 --> 00:19:07,340 absurd places that make London and San Francisco and New York 313 00:19:07,370 --> 00:19:09,620 look astoundingly cheap, including in China, 314 00:19:10,400 --> 00:19:14,540 cities that almost nobody outside of China knows about. 315 00:19:14,710 --> 00:19:17,660 You're talking about second and third tier cities where housing is inordinate 316 00:19:17,660 --> 00:19:18,493 expensive. 317 00:19:18,730 --> 00:19:23,380 I basically think it comes down to that financial repression model that comes 318 00:19:23,380 --> 00:19:27,900 through with East Asian development states. If you have capital controls, 319 00:19:27,920 --> 00:19:32,820 you won't let people invest overseas and you don't provide a sort 320 00:19:32,820 --> 00:19:37,820 of financial market that's based on returns for 321 00:19:38,060 --> 00:19:38,690 ordinary investors, 322 00:19:38,690 --> 00:19:43,490 that it's oriented towards funding either state 323 00:19:43,490 --> 00:19:47,380 backed companies or particular export oriented industries, 324 00:19:47,470 --> 00:19:51,940 and everything is structured around getting them cheap funding. You are going to 325 00:19:52,700 --> 00:19:56,180 repress the financial activity, the ability to make returns among households. 326 00:19:56,480 --> 00:20:00,970 Then land is always going to be a great thing to invest in only so much you can 327 00:20:00,970 --> 00:20:04,620 sort of smother the returns to it's either valuable or it's not 328 00:20:06,200 --> 00:20:09,780 in a way that you can fiddle in lots of ways with what happens with a private 329 00:20:09,780 --> 00:20:12,340 company. It's much more difficult to do that with land, 330 00:20:12,340 --> 00:20:14,020 and I think that's basically the answer. 331 00:20:15,130 --> 00:20:17,540 It's true in Japan after the second World War. 332 00:20:17,690 --> 00:20:21,490 It's true in Korea through parts of its history. It's true in China now. 333 00:20:21,570 --> 00:20:23,460 It's actually true in Taiwan to some extent. 334 00:20:24,020 --> 00:20:25,900 I think that's the thread that runs through it. 335 00:20:27,800 --> 00:20:32,700 Do we need to introduce a Brit ISA in the UK so that we can fund our 336 00:20:32,740 --> 00:20:33,570 noble, 337 00:20:33,570 --> 00:20:37,140 homegrown British land rather than sending our investments into useless foreign 338 00:20:37,390 --> 00:20:38,223 stock markets? 339 00:20:39,010 --> 00:20:41,300 Yeah, that sounds like a great idea. 340 00:20:41,410 --> 00:20:44,860 Just there's a bit of financial repression for the UK would do wonders. 341 00:20:45,800 --> 00:20:49,170 One thing that might, well, that might help though. So I'm very interested in, 342 00:20:49,350 --> 00:20:52,170 so on the one hand you are saying, 343 00:20:52,740 --> 00:20:54,410 and I by the way believe you, 344 00:20:54,880 --> 00:20:59,010 that these Chinese cities are because of their incentives that they can only 345 00:20:59,290 --> 00:21:03,850 generate revenue by selling leases to build property and because everyone wants 346 00:21:03,850 --> 00:21:04,683 to invest in property, 347 00:21:04,930 --> 00:21:08,240 the only thing they're allowed to invest in that work can't be robbed from them 348 00:21:08,240 --> 00:21:11,690 very easily in the future. There's a massive oversupply of housing, 349 00:21:12,070 --> 00:21:16,650 but also that property prices as relative to income are extremely high. 350 00:21:17,190 --> 00:21:19,960 But is it also true that rents relative to income are extremely low? 351 00:21:20,150 --> 00:21:23,610 So the properties have very low yields, but very high prices. 352 00:21:24,660 --> 00:21:29,170 Properties in China have extraordinarily low rental yields. 353 00:21:29,170 --> 00:21:32,480 You're talking about very, very low single digits. 354 00:21:33,380 --> 00:21:37,330 Often the most popular cities, you're talking about less than 1%, right? 355 00:21:37,670 --> 00:21:39,170 So in a country that's growing, 356 00:21:39,720 --> 00:21:42,610 I mean now it's growing 5% per annum or whatever, 357 00:21:42,740 --> 00:21:45,170 but it was once growing at 10, 11, 12, 358 00:21:45,710 --> 00:21:48,960 and you're getting a sort of sub 1% yield. Honestly, 359 00:21:49,310 --> 00:21:52,810 rental markets in a lot of Chinese cities are very small as well. 360 00:21:53,210 --> 00:21:57,370 They really don't exist. These are home ownership oriented places. 361 00:21:58,570 --> 00:21:59,403 I think there is, 362 00:22:00,450 --> 00:22:04,480 I loathed to bring this up with some people who, 363 00:22:05,040 --> 00:22:07,810 like me generally believe quite strongly in efficient markets, 364 00:22:08,230 --> 00:22:13,090 but there are some sort of obvious speculative behaviours going 365 00:22:13,090 --> 00:22:13,290 on. 366 00:22:13,290 --> 00:22:18,210 There are people in China who will save and save and save to buy 367 00:22:18,730 --> 00:22:22,480 a second and a third and a fourth property if they can get their hands on it. 368 00:22:22,540 --> 00:22:25,480 These are not rental properties. They're left vacant, 369 00:22:25,950 --> 00:22:29,480 and these are in families where the family structure is getting smaller and 370 00:22:29,480 --> 00:22:31,690 smaller with every generation. They're not to pass on. 371 00:22:32,650 --> 00:22:37,210 I think it is a case of both a historical attachment and the fact that there is 372 00:22:37,210 --> 00:22:39,330 really nothing else to invest in. Also, 373 00:22:39,330 --> 00:22:43,530 lots of Chinese buyers completely rationally got the idea for a very long time 374 00:22:43,530 --> 00:22:46,970 that for political reasons, despite the fact that it's not a democracy at all, 375 00:22:47,040 --> 00:22:48,210 that for political reasons, 376 00:22:48,270 --> 00:22:52,010 the Chinese government would simply not allow house prices to go down, 377 00:22:52,200 --> 00:22:55,890 that this was part of the social compact and that they wouldn't permit it to 378 00:22:55,890 --> 00:22:58,240 happen. And if you believe that, 379 00:22:58,560 --> 00:23:01,810 then obviously it's worth buying property at almost any price. 380 00:23:02,130 --> 00:23:05,930 If you believe the dynamic is that the government must ratchet the price up, 381 00:23:06,280 --> 00:23:09,850 then it doesn't matter how expensive it's or how low the rental will yield is 382 00:23:09,850 --> 00:23:14,410 because it's one way travel. So it's not a totally irrational thing, 383 00:23:14,410 --> 00:23:15,970 or at least it wasn't for a very long time. 384 00:23:15,980 --> 00:23:20,290 The last few years have sort of questioned that premise pretty aggressively, 385 00:23:20,390 --> 00:23:24,610 but I think it was pretty sensible of them for a very extended period. 386 00:23:25,450 --> 00:23:27,660 That sounds like then that basically, 387 00:23:27,730 --> 00:23:32,660 it's very interesting coming from a perspective where we talk about all the time 388 00:23:32,660 --> 00:23:34,140 we're thinking about housing supply. 389 00:23:34,160 --> 00:23:35,940 The problem is we don't have enough housing supply. 390 00:23:36,200 --> 00:23:39,380 If our local governments were given the right to print money by selling off 391 00:23:40,280 --> 00:23:41,113 leases, 392 00:23:41,890 --> 00:23:45,890 this would be like a gangbusters policy reform for the UK because right now 393 00:23:45,890 --> 00:23:50,210 that's the kind of thing where we are very much not in the situation of only 394 00:23:50,210 --> 00:23:53,770 having houses to invest in. We just don't have that many houses to invest in. 395 00:23:54,590 --> 00:23:55,650 So that's very interesting. 396 00:23:55,790 --> 00:23:58,530 One thing I've heard about is that despite all of this, 397 00:23:58,960 --> 00:24:00,330 Hong Kong has a housing shortage, 398 00:24:00,830 --> 00:24:04,170 and that sounds reasonable when you think like, oh yeah, okay, 399 00:24:04,170 --> 00:24:06,650 Hong Kong's just this tiny island with loads of islands on it. 400 00:24:06,710 --> 00:24:11,290 But then I discovered that about 95% of Hong Kong is unbuilt and loads of that 401 00:24:11,290 --> 00:24:14,090 is farmland and lots of that farmland is not even farmed. 402 00:24:14,550 --> 00:24:15,730 Can you tell me what's going on here? 403 00:24:16,360 --> 00:24:21,210 Yeah, it's a great question, and I think just on the previous one, 404 00:24:22,150 --> 00:24:26,130 one of the things that the best explanation that was ever given to me on this 405 00:24:26,670 --> 00:24:31,650 was that China manages to exhibit all the worst symptoms of both a 406 00:24:31,650 --> 00:24:34,130 housing glut and a housing shortage all at the same time. 407 00:24:34,980 --> 00:24:39,330 So extraordinary waste in absolutely rampant building and places that nobody 408 00:24:39,330 --> 00:24:42,290 will ever live at the same time as like 20, 409 00:24:42,390 --> 00:24:45,130 30 times price to income ratios are quite common. 410 00:24:45,930 --> 00:24:47,730 Threading that all together is complicated, 411 00:24:47,790 --> 00:24:52,480 but it really is a pretty awful system in lots of ways. In Hong Kong, 412 00:24:53,870 --> 00:24:57,410 the relationship between the government and the developers I find enormously 413 00:24:57,650 --> 00:24:58,310 interesting. 414 00:24:58,310 --> 00:25:03,010 So you've basically got to go back to the 1960s to I think start this story. 415 00:25:03,070 --> 00:25:05,890 The Hong Kong population is absolutely booming, 416 00:25:06,310 --> 00:25:07,850 partly because the cultural revolution, 417 00:25:07,910 --> 00:25:12,770 partly because people have lots of children and it is a space constrained place. 418 00:25:13,030 --> 00:25:16,970 You're right that there's actually a lot of place space that you could build on, 419 00:25:17,590 --> 00:25:22,330 but it is a space constrained place and house prices and 420 00:25:22,380 --> 00:25:24,610 rents are going crazy in Hong Kong. 421 00:25:26,070 --> 00:25:29,450 You start to see these local players emerge and they're taking over from the 422 00:25:29,450 --> 00:25:32,090 honks. These are people like Lee Ka Shing. 423 00:25:32,400 --> 00:25:35,890 There's a handful of major real estate developers. 424 00:25:36,520 --> 00:25:41,450 There's a system that's brought in which transfers development rights 425 00:25:41,800 --> 00:25:45,370 from farmers in the new territories of Hong Kong, 426 00:25:45,370 --> 00:25:48,730 which is essentially you have Hong Kong Island that everyone knows Calhoun, 427 00:25:48,730 --> 00:25:51,810 the new territories go all the way up to the border with mainland China. 428 00:25:51,840 --> 00:25:55,890 They're at this point, mostly rural, large parts of 'em still are, right? 429 00:25:55,890 --> 00:26:00,770 They have interesting sort of clan rights to the use of that land 430 00:26:00,770 --> 00:26:01,590 in some places. 431 00:26:01,590 --> 00:26:05,370 But basically the idea is you can get these farmers to sell the land to the 432 00:26:05,370 --> 00:26:10,240 developers and they'll be able to use it. What happens is you get 433 00:26:10,240 --> 00:26:14,090 these letters, these transferable rights, letters A and letters B, 434 00:26:14,390 --> 00:26:18,650 and the letters B. These real estate developers accumulate in enormous numbers. 435 00:26:19,020 --> 00:26:22,050 Again, I don't mean to be too market inefficient. 436 00:26:22,290 --> 00:26:26,130 A lot of these farmers are functionally illiterate and they're selling something 437 00:26:26,130 --> 00:26:29,210 and they really don't have a good idea of the value of it. 438 00:26:29,670 --> 00:26:32,480 The real estate developers start accumulating them. 439 00:26:32,930 --> 00:26:37,570 A lot of the battle now in Hong Kong between the developers and the government 440 00:26:38,030 --> 00:26:40,970 is around the use of these development rights. 441 00:26:40,980 --> 00:26:45,770 So the developers say the government has made it too expensive to 442 00:26:46,120 --> 00:26:49,370 convert what the existing agricultural land they have, 443 00:26:49,430 --> 00:26:50,690 and they have the development rights, 444 00:26:50,690 --> 00:26:55,410 but you still have to pay the government to convert it into residential or urban 445 00:26:55,460 --> 00:26:59,130 space. The developers say it's extraordinarily expensive to do this, 446 00:26:59,130 --> 00:26:59,890 it's too expensive, 447 00:26:59,890 --> 00:27:03,890 and that's not why we're not doing it. The government says the developer's being 448 00:27:03,890 --> 00:27:08,690 greedy, et cetera, et cetera. But I think the real reason behind this 449 00:27:10,190 --> 00:27:15,010 is that the Hong Kong government's incentives are a bit mixed up 450 00:27:15,150 --> 00:27:16,730 now when it comes to land prices. 451 00:27:17,190 --> 00:27:22,170 So basically all of the investment spending in Hong Kong is meant to be paid for 452 00:27:22,390 --> 00:27:26,050 by land auction revenue. As such, 453 00:27:26,270 --> 00:27:30,410 you need land prices to be high to some extent, 454 00:27:31,230 --> 00:27:35,290 and this has led to what is called in Hong Kong a high land price policy. 455 00:27:35,990 --> 00:27:40,370 This is both the government now it's the government under British rule as well. 456 00:27:40,630 --> 00:27:44,610 It got this nickname in the seventies, and it's basically just never changed. 457 00:27:45,520 --> 00:27:50,210 That would be the sort of high land price policy model 458 00:27:50,510 --> 00:27:54,450 for why you don't get all of this land released for house building, 459 00:27:54,830 --> 00:27:58,480 and it's because the Hong Kong government incentives run in the wrong direction. 460 00:27:58,480 --> 00:27:59,450 Whereas in Singapore, 461 00:27:59,450 --> 00:28:04,130 they've run towards having a 90% home ownership rate. 462 00:28:04,350 --> 00:28:07,890 The Hong Kong government has focused on revenue maximisation in a way that 463 00:28:07,890 --> 00:28:10,210 hasn't necessarily led to the most houses being built. 464 00:28:11,860 --> 00:28:13,110 Very interesting. I've also heard, 465 00:28:13,370 --> 00:28:17,070 and this is maybe as too much for rabbit hole, 466 00:28:17,730 --> 00:28:18,563 but it's intriguing. 467 00:28:18,810 --> 00:28:22,870 So you told us that Hong Kong owns all of the freeholds of Hong Kong. 468 00:28:22,870 --> 00:28:25,630 Still the Hong Kong government does, but it sells off leaseholds. 469 00:28:25,770 --> 00:28:30,310 But I've heard that it has an extraordinary power that no other freeholder has, 470 00:28:30,310 --> 00:28:35,270 which is that it can arbitrarily decide to resume its freehold at any point and 471 00:28:35,470 --> 00:28:39,240 pay off the people. Now, why doesn't it do that with, 472 00:28:39,680 --> 00:28:41,520 I know most buildings in Hong Kong are pretty tall, 473 00:28:41,540 --> 00:28:43,480 but they're not all massive skyscrapers. 474 00:28:43,980 --> 00:28:47,000 Why doesn't it resume the leaseholds and kick all the people out? 475 00:28:47,000 --> 00:28:48,560 Is this just a political issue? 476 00:28:49,120 --> 00:28:51,100 That's exactly it. That's exactly it. I mean, 477 00:28:51,170 --> 00:28:54,100 it's funny because I think a lot of people struggle with this, 478 00:28:54,550 --> 00:28:57,660 especially when they live in a democratic system hearing about it, 479 00:28:57,920 --> 00:28:59,780 and Hong Kong's not a democratic system really. 480 00:28:59,800 --> 00:29:02,500 It has limited local democracy powers, 481 00:29:02,500 --> 00:29:06,500 but the government could trample people in a way that you couldn't in a western 482 00:29:06,500 --> 00:29:09,900 country, that there is still immense political squeezes on them. 483 00:29:10,240 --> 00:29:13,860 The families that live in the new territories are enormously political powerful. 484 00:29:13,860 --> 00:29:16,340 These are sort of the original Hong Kong residents, 485 00:29:16,340 --> 00:29:19,500 the clans that have lived there for hundreds and hundreds of years. 486 00:29:20,490 --> 00:29:24,220 It's actually really difficult to expropriate these people essentially, 487 00:29:24,910 --> 00:29:27,860 which I think the government in lots of sense would like to do. 488 00:29:28,220 --> 00:29:30,420 I also think there's something in the Hong Kong government, 489 00:29:30,910 --> 00:29:35,060 which is that they genuinely have been very successful by being less, say fair. 490 00:29:35,560 --> 00:29:38,780 If you look at the post-war period in Hong Kong, 491 00:29:39,090 --> 00:29:42,490 Hong Kong charts this path that almost no one else in the rest of the world is 492 00:29:42,490 --> 00:29:45,450 taking, right? Everywhere in the rest of the world is all, 493 00:29:46,100 --> 00:29:48,530 let's say fair is dead. Industrial policy is here, 494 00:29:48,530 --> 00:29:51,050 we're going to intervene in every market. We're going to have welfare states, 495 00:29:51,050 --> 00:29:53,730 we're going to have everything. Hong Kong says, absolutely not. 496 00:29:53,730 --> 00:29:58,330 We're not doing any of this and prosperous through in large part not doing it. 497 00:29:58,590 --> 00:30:00,890 So I think there's a deep vein of 498 00:30:02,640 --> 00:30:06,210 dislike of intervention in general and people who just don't want to do it. 499 00:30:06,210 --> 00:30:07,370 Whereas in Singapore, 500 00:30:07,470 --> 00:30:11,810 you have that sort of unusual blend of active industrial policy in some areas, 501 00:30:12,390 --> 00:30:16,890 extraordinarily interventionist policy and land while actually being quite sort 502 00:30:16,890 --> 00:30:19,650 of liberal and pro market in lots of other ways. 503 00:30:20,950 --> 00:30:24,090 So we've talked a lot about China, Singapore, and Hong Kong. 504 00:30:24,090 --> 00:30:26,610 Now I have some questions about Korea, Taiwan, and Japan. 505 00:30:27,390 --> 00:30:30,210 So one thing I'm aware of is that Korea, Taiwan, 506 00:30:30,270 --> 00:30:34,250 and Japan all had massive post-war land reforms, right? 507 00:30:34,310 --> 00:30:38,530 So all the land in the country got taken from the big landowners and split up. 508 00:30:39,030 --> 00:30:40,170 If I recall correctly, 509 00:30:40,350 --> 00:30:43,650 in Japan there was a maximum landholding size imposed after the war, 510 00:30:43,650 --> 00:30:46,210 and it was like an acre or three acres or something like that. 511 00:30:46,270 --> 00:30:50,730 So an astonishingly inefficient spread of everyone as though we were going to be 512 00:30:50,730 --> 00:30:53,770 like mediaeval subsistence farmers across the entire country of Japan. 513 00:30:54,110 --> 00:30:58,850 And yet soon after that, Japan has an agricultural revolution, 514 00:30:59,320 --> 00:31:03,010 becomes very productive across everything, has massively growing cities. 515 00:31:03,590 --> 00:31:06,130 How is this possible, and tell me what happened in the other countries as well. 516 00:31:07,260 --> 00:31:10,620 Absolutely. So I would say that these three places, Taiwan, 517 00:31:11,190 --> 00:31:16,100 Japan and South Korea have these sort of unique political circumstances 518 00:31:16,170 --> 00:31:17,340 that allowed this to happen. 519 00:31:18,090 --> 00:31:21,500 It's why there were dozens of attempts to do this in other parts of the world, 520 00:31:21,570 --> 00:31:25,220 none of them anything as sort of comprehensive as in these three places. 521 00:31:25,930 --> 00:31:29,140 Basically Japan goes first, it's 1945. 522 00:31:29,390 --> 00:31:31,140 Japan is materially devastated, 523 00:31:31,720 --> 00:31:36,460 and MacArthur General MacArthur wields more 524 00:31:36,460 --> 00:31:40,740 power in Japan than probably any American has had over anything ever, right? 525 00:31:40,810 --> 00:31:43,700 He's essentially got the powers of a king, right? 526 00:31:43,730 --> 00:31:45,380 He's the only American king ever. 527 00:31:46,400 --> 00:31:50,660 And he becomes this enormous land reform proponent. 528 00:31:51,210 --> 00:31:56,060 There's a guy, Wolf Ladejinskyi, who works at the Department of Agriculture. 529 00:31:56,120 --> 00:32:00,300 He specialised in Japanese land and he's become obsessed with the idea 530 00:32:01,200 --> 00:32:06,060 of land reform, of redistribution from large landowners to tenant farmers. 531 00:32:06,440 --> 00:32:10,420 And basically he sells MacArthur on this. MacArthur doesn't need much pushing, 532 00:32:10,760 --> 00:32:15,220 but he becomes a bit of an obsessive. So MacArthur forces the Japanese 533 00:32:15,220 --> 00:32:19,660 government to bring to him a law expropriating the large 534 00:32:19,940 --> 00:32:23,900 landlords, and handing the land out, and MacArthur sends it back and says, 535 00:32:23,900 --> 00:32:25,100 you're not doing anything like enough. 536 00:32:26,840 --> 00:32:31,220 We need to expropriate dramatically more middle-sized landholders. 537 00:32:31,600 --> 00:32:36,380 And so they do this and land reform happens and it's one of the biggest 538 00:32:36,530 --> 00:32:41,050 sort of redistributions ever really outside of a 539 00:32:41,050 --> 00:32:44,970 communist country, which I suppose isn't redistribution in the same way, 540 00:32:45,160 --> 00:32:48,810 basically a huge amount, I dunno the numbers to hand, but as you say, 541 00:32:48,810 --> 00:32:51,010 these are pretty small parcels of land. 542 00:32:51,420 --> 00:32:53,610 Often they're not economic to run at all. 543 00:32:54,150 --> 00:32:58,170 Now if you look at Taiwan and South Korea, you have similar stories. 544 00:32:58,830 --> 00:33:01,490 Taiwan not governed by America, 545 00:33:01,830 --> 00:33:06,050 but at the end of the Chinese civil war in 1949, Chiang Kai-shek, 546 00:33:06,510 --> 00:33:09,210 the leader of nationalist China, arrives in Taiwan. 547 00:33:10,110 --> 00:33:12,930 He imposes martial law soon afterwards. 548 00:33:13,200 --> 00:33:15,650 He's got no Taiwanese power base, 549 00:33:15,740 --> 00:33:20,170 right? He's brought with him several million people 550 00:33:20,560 --> 00:33:24,170 from the mainland, including the remnants of the nationalist army. 551 00:33:24,550 --> 00:33:28,210 He doesn't have to accumulate political support in what remains of Taiwan. 552 00:33:28,480 --> 00:33:31,970 He's repopulating a large part of this country, and in rural Taiwan, 553 00:33:32,390 --> 00:33:35,210 he has no power base really, it's extremely limited. 554 00:33:35,320 --> 00:33:38,450 It's mostly urban Taiwan where the people from the mainland move to. 555 00:33:38,870 --> 00:33:40,130 And in rural Taiwan, 556 00:33:40,270 --> 00:33:44,890 you can actually gain quite a bit of support by giving tenants all of this land. 557 00:33:45,180 --> 00:33:45,560 Again, 558 00:33:45,560 --> 00:33:50,450 this is supported by the same cast of characters from the US who arrange 559 00:33:50,470 --> 00:33:54,130 the land reforms in Japan. Wolf Ladejinskyi is in Taipei. 560 00:33:54,680 --> 00:33:58,450 There's also a bunch of other people in DC who are very in favour of these 561 00:33:58,770 --> 00:34:03,090 policies. Something very similar happens in South Korea as well. 562 00:34:03,350 --> 00:34:08,210 And in all of these places, the huge fear is that you either do this, 563 00:34:08,590 --> 00:34:13,570 you either make this payoff to a huge number of peasants or you get 564 00:34:13,570 --> 00:34:17,210 communism. And when you're the government of South Korea or the government of 565 00:34:17,210 --> 00:34:20,970 the Republic of China, that threat is not an abstract one anymore, right? 566 00:34:21,160 --> 00:34:25,090 They're doing land reform in North Korea before they collectivise everything 567 00:34:25,200 --> 00:34:26,650 they give land away to peasants. 568 00:34:26,670 --> 00:34:30,210 So you have to sort of follow this just to politically keep up. 569 00:34:30,510 --> 00:34:32,250 So they had these enormous schemes, 570 00:34:32,430 --> 00:34:36,970 but these extremely unique political circumstances that allow them through in 571 00:34:36,970 --> 00:34:37,450 this very, 572 00:34:37,450 --> 00:34:41,970 very brief period when the landfall movement trickles out across the rest of 573 00:34:41,970 --> 00:34:44,170 Asia, everyone's trying in Southeast Asia, 574 00:34:44,170 --> 00:34:47,050 they're trying India dramatically less successful. 575 00:34:47,750 --> 00:34:51,570 And there's an argument about what the sort of economic impacts of these are as 576 00:34:51,570 --> 00:34:56,490 well. Some people very, very positive about the economic impact in Japan. 577 00:34:56,680 --> 00:35:00,360 It's a really good recent paper that looked at the Taiwanese impact and found 578 00:35:01,250 --> 00:35:04,930 positive economic impacts from only the first stage of land reform at later more 579 00:35:04,930 --> 00:35:08,690 expropriate stages as you didn't have the sort of positive impact you were 580 00:35:08,690 --> 00:35:09,300 looking for. 581 00:35:09,300 --> 00:35:13,800 The idea being there that an individual tenant farmer has more interest in 582 00:35:14,260 --> 00:35:17,290 maximising the use of the land that they're given. But yeah, 583 00:35:17,590 --> 00:35:21,570 this was not a success anywhere else. These three places really sort of lasting, 584 00:35:21,680 --> 00:35:23,930 sustained and embedded land reform. 585 00:35:24,480 --> 00:35:29,360 It's basically just there everywhere else in the world it was at 586 00:35:29,360 --> 00:35:32,930 least messy and often just a total disaster. 587 00:35:35,960 --> 00:35:38,970 This dovetails with another thing I'm very interested in and have been 588 00:35:38,970 --> 00:35:41,450 interested in over the last few months since I discovered it, 589 00:35:42,230 --> 00:35:47,130 is there's a policy invented in Germany in the 1890s by 590 00:35:47,470 --> 00:35:49,800 the mayor of Frankfurt who also invented zoning, 591 00:35:50,990 --> 00:35:55,170 had the first zoning system called Land readjustment and what in Germany, 592 00:35:55,340 --> 00:36:00,290 the purpose of this was for taking inefficient plot sized farms 593 00:36:00,300 --> 00:36:03,530 and turning 'em into larger ones, either just to be better farms 594 00:36:06,590 --> 00:36:11,290 or to be used for housing. They were in inefficient plots. And we, 595 00:36:11,340 --> 00:36:12,173 we've all seen, 596 00:36:12,450 --> 00:36:15,170 I mean if actually we've all seen this probably exaggeration here, 597 00:36:15,430 --> 00:36:16,320 if you like me, 598 00:36:16,320 --> 00:36:19,010 spend a lot of time going on satellite views of different cities around the 599 00:36:19,010 --> 00:36:19,320 world, 600 00:36:19,320 --> 00:36:24,250 then you'll have seen interesting town shapes where the plots of the mediaeval 601 00:36:24,250 --> 00:36:26,290 plots called burg plots, the long thin plots, 602 00:36:26,390 --> 00:36:30,770 the mediaeval plots have determined what the city looks like. And so the most 603 00:36:31,050 --> 00:36:32,210 extreme cases are in Poland, 604 00:36:32,860 --> 00:36:37,690 but basically when you combine roads with thin plots, 605 00:36:37,690 --> 00:36:42,690 you get a bunch of houses on these little attachment roads to a main road and 606 00:36:43,300 --> 00:36:47,050 you never get any grids or a sensible logical village shape anyway. In Germany, 607 00:36:47,050 --> 00:36:48,690 they use this policy called land readjustment. 608 00:36:48,710 --> 00:36:52,800 What's really interesting about it is that you have to get a double majority. 609 00:36:53,270 --> 00:36:57,930 So you have to get two thirds of landowners by number and two thirds of 610 00:36:57,930 --> 00:37:01,130 landowners by landholding, and then they reorganise the plot. 611 00:37:01,130 --> 00:37:04,770 So it's more efficient. And in Germany, they did this to, I dunno, 612 00:37:04,930 --> 00:37:06,050 a hundred million hectares, 613 00:37:06,280 --> 00:37:10,970 like 40% of all German farmland after the second world war went through land 614 00:37:10,970 --> 00:37:14,970 readjustments. And there's a sad side about this I don't like to talk about, 615 00:37:14,970 --> 00:37:18,090 which is that they got rid of most of their hedge rows through this because they 616 00:37:18,090 --> 00:37:20,800 were like, no, not efficient anymore. And I'll be very, 617 00:37:20,800 --> 00:37:24,610 very sad if someone did this to the English countryside. But anyway, 618 00:37:25,410 --> 00:37:28,010 I understand that. Interestingly enough, 619 00:37:28,340 --> 00:37:32,450 Japan in 1916 liked the German system, 620 00:37:32,450 --> 00:37:33,890 copied it into their planning law. 621 00:37:33,910 --> 00:37:38,690 And then when Japan invaded and colonised Taiwan and South Korea imposed it on 622 00:37:38,690 --> 00:37:40,250 them as well, and they kept it later. 623 00:37:40,510 --> 00:37:44,800 And so all of these countries had a tool which allowed them to deal with the 624 00:37:44,800 --> 00:37:46,490 worst excesses of land reform. 625 00:37:46,490 --> 00:37:51,490 And I wonder if this was one other reason why land reform was uniquely 626 00:37:51,490 --> 00:37:53,410 successful in these three countries and not elsewhere. 627 00:37:54,720 --> 00:37:55,800 I think that is reasonable, 628 00:37:55,900 --> 00:38:00,880 and it's Annie Martin wrote a wonderful piece for you guys on the experience 629 00:38:00,880 --> 00:38:05,520 of land readjustment in Japan. You guys know as much about this as I do, 630 00:38:06,180 --> 00:38:11,110 but the handing out of land to very large numbers of people 631 00:38:11,820 --> 00:38:16,680 and the fact that a lot of the plots were really not economical in a 632 00:38:16,680 --> 00:38:17,513 meaningful way at all. 633 00:38:18,110 --> 00:38:22,640 That combined with the extremely rapid urbanisation that was happening in Japan, 634 00:38:22,640 --> 00:38:27,360 obviously these are to some extent two sides of the same coin allow for this to 635 00:38:27,360 --> 00:38:31,590 happen. So you see not just that, 636 00:38:31,780 --> 00:38:35,530 but all through the second half of the 20th century, 637 00:38:35,590 --> 00:38:39,800 or at least the first 30 years, 40 years after the end of the second World War, 638 00:38:40,070 --> 00:38:45,010 you see this huge transfer of land owned by households in Japan 639 00:38:45,390 --> 00:38:50,010 to companies. And this is a large part, an urbanisation story, 640 00:38:50,010 --> 00:38:53,930 but it's this enormous sectoral transfer. I, 641 00:38:53,950 --> 00:38:56,210 I'm really interested in this because 642 00:38:58,110 --> 00:39:02,290 it's an important question for large parts of the rest the world as to 643 00:39:03,030 --> 00:39:07,010 how this is done. Well, and I wanted to ask you actually, 644 00:39:07,110 --> 00:39:11,360 is there anything about the sort of German or Japanese systems, 645 00:39:11,890 --> 00:39:16,570 anything that you've seen given a lever that you would apply to the western 646 00:39:16,740 --> 00:39:19,770 world, apply in the uk, apply in the us basically, 647 00:39:19,770 --> 00:39:23,490 what do you think these systems have that has made this sometimes successful 648 00:39:23,800 --> 00:39:25,450 that has been missing in the rest of the world? 649 00:39:26,140 --> 00:39:27,750 Well, so as a tiny little tidbit. 650 00:39:28,270 --> 00:39:32,670 I happened to discover recently that the process of enclosure actually used the 651 00:39:32,670 --> 00:39:36,300 land readjustment model. So in Britain in like 1500, 652 00:39:36,300 --> 00:39:38,270 about 30% of land was common land. 653 00:39:38,730 --> 00:39:42,300 Now the common understanding of common land is that everyone could just graze 654 00:39:43,160 --> 00:39:45,550 their people there, graze their animals there. That's not true. 655 00:39:45,770 --> 00:39:47,110 You had to have other land, 656 00:39:47,110 --> 00:39:49,990 you had to be a landholder in your own right to have a share of common land. 657 00:39:50,210 --> 00:39:53,990 And usually you had a share of common land that was in proportion to your share 658 00:39:54,050 --> 00:39:54,883 of the, 659 00:39:55,130 --> 00:39:58,790 you had rights to common land that were in proportion to your share of the other 660 00:39:58,820 --> 00:40:01,750 land. So in fact, all the landless labourers, 661 00:40:01,750 --> 00:40:05,510 which were like say 40% of the people in the 1700s had no right to this common 662 00:40:05,510 --> 00:40:09,190 land at all. But interestingly, when they enclosed this land, 663 00:40:09,190 --> 00:40:12,590 which has turned it into individual private plots, shared it out among people, 664 00:40:12,740 --> 00:40:15,630 they used the system initially you had to get a hundred percent approval, 665 00:40:15,650 --> 00:40:16,630 so everyone had to approve, 666 00:40:16,840 --> 00:40:20,860 and they basically only got it going in giant landholder areas where one guy 667 00:40:20,860 --> 00:40:22,990 could send his goons, obviously the other guy's houses and say, 668 00:40:23,210 --> 00:40:25,990 you're going to approve of this, but right, you can have your, 669 00:40:26,650 --> 00:40:30,790 but later on they got it to an 80% system. And so 80% of people had to petition 670 00:40:30,790 --> 00:40:35,630 parliament. So this kind of system, same kind of system used in Taiwan, 671 00:40:35,800 --> 00:40:38,300 Japan and South Korea today and over the last 50 years, 672 00:40:38,490 --> 00:40:43,150 and the same system used to reorganise German farmland is what was used in the 673 00:40:43,170 --> 00:40:47,110 UK. But the UK actually has efficient plots of land now most of the time. 674 00:40:47,250 --> 00:40:49,550 And we have good mechanisms for making them more efficient. 675 00:40:49,550 --> 00:40:52,630 And that's not a big worry for us, unlike in Japan. 676 00:40:53,090 --> 00:40:58,030 The thing we don't have I think is our system for deciding who is allowed to 677 00:40:58,030 --> 00:41:01,230 build what in a particular place is very confusing with loads of overlapping 678 00:41:01,230 --> 00:41:03,790 rights and the wrong incentives and so on. 679 00:41:03,840 --> 00:41:08,750 And so I would like to learn a system from land readjustment where you can use 680 00:41:08,750 --> 00:41:13,630 that same mechanism of letting the majority decide not what gets 681 00:41:13,630 --> 00:41:15,340 done. Because if it was just permissions, 682 00:41:15,340 --> 00:41:17,670 then it wouldn't necessarily oblige you to use those permissions, 683 00:41:18,090 --> 00:41:19,910 but letting the majority decide, okay, 684 00:41:20,320 --> 00:41:24,910 let's find out what the best thing for everyone is on a smaller scale than 685 00:41:24,930 --> 00:41:27,710 across the whole country or across a whole council area. 686 00:41:28,090 --> 00:41:32,190 And I think that you could do that through giving people the right to up zone 687 00:41:32,190 --> 00:41:36,130 their own street with a super majority, 688 00:41:36,250 --> 00:41:40,250 I reckon like in land readjustment. A question I wanted to ask you. 689 00:41:41,030 --> 00:41:41,930 Ben, before you do that, 690 00:41:42,790 --> 00:41:45,690 can you actually explain what land readjustment is for people who don't know? 691 00:41:46,150 --> 00:41:49,170 Yes. So land readjustment, the original form in Germany, 692 00:41:49,520 --> 00:41:53,690 basically a bunch of landowners get together or a local government or the 693 00:41:53,840 --> 00:41:55,050 national government comes to them and says, 694 00:41:55,230 --> 00:41:56,970 we want to reorganise land in this way. 695 00:41:57,190 --> 00:42:01,450 And so usually the reason for farm land readjustment would 696 00:42:02,730 --> 00:42:06,930 be because farms are in inefficient plot shape. So in the mediaeval era, 697 00:42:07,110 --> 00:42:07,943 if you're a villain, 698 00:42:08,240 --> 00:42:12,210 then you would have a bunch of strips of land that you would have hereditary 699 00:42:12,210 --> 00:42:15,840 right to farm, spread around a big farm in your manner, 700 00:42:16,070 --> 00:42:20,210 and there'll be a freeholder, which would be the lord of the manor, 701 00:42:20,470 --> 00:42:23,770 and then you would be this villain who could farm those strips and they were 702 00:42:23,770 --> 00:42:25,210 spread out. So it was quite inefficient. 703 00:42:25,210 --> 00:42:29,450 You spent a lot of time moving your plough from one thing to another. 704 00:42:29,450 --> 00:42:31,970 And this happened in lots of different countries, but on the plus side, 705 00:42:32,150 --> 00:42:36,320 you had a fair share of all the different fields. So if there was a bad crop 706 00:42:37,110 --> 00:42:39,970 in one bit of the area, then you wouldn't necessarily die, 707 00:42:39,970 --> 00:42:42,360 which is a good reason for it. And over time, 708 00:42:42,360 --> 00:42:44,650 everywhere wants to rationalise into these into more efficient 709 00:42:46,160 --> 00:42:50,090 farm shapes and enclosure did that. That's one thing Enclosure did in the uk. 710 00:42:50,270 --> 00:42:52,530 And land adjustment is another mechanism for doing this. 711 00:42:52,760 --> 00:42:56,360 Basically the same thing. You go around and say, we are going to turn it into, 712 00:42:56,360 --> 00:42:58,770 instead of you having eight plots spread across all these different places, 713 00:42:58,940 --> 00:43:01,450 we're going to merge them together. And this is roughly the same value. 714 00:43:01,450 --> 00:43:03,890 We've got a committee together who's judged that's roughly the same value. 715 00:43:04,360 --> 00:43:07,450 Everyone gets the same value farm out of the other side, but in fact, 716 00:43:07,450 --> 00:43:11,570 you raise all of the value in total higher because you don't have to move your 717 00:43:11,840 --> 00:43:14,410 plough between all the different places. So that's classic farmland, 718 00:43:14,410 --> 00:43:18,880 readjustment. You might also do it to turn farmland into better 719 00:43:19,440 --> 00:43:20,273 building land. 720 00:43:20,420 --> 00:43:25,000 So if you want to develop a plus land and it's got a hundred different plots, 721 00:43:25,140 --> 00:43:28,200 it might be really hard to get everyone to agree and then you might have to 722 00:43:28,200 --> 00:43:32,280 build this pockmarked weird shape development that's much less efficient than if 723 00:43:32,280 --> 00:43:35,480 you could just get everyone to agree. And so that land readjustment, 724 00:43:35,840 --> 00:43:39,110 which is the kind that was built most of the houses in Germany on greenfield 725 00:43:39,110 --> 00:43:43,920 after the second World War and built 30% of Japan's urban areas 726 00:43:44,340 --> 00:43:47,680 is where you agree, okay, we're going to consolidate all our land, 727 00:43:47,730 --> 00:43:48,800 build a development on it, 728 00:43:48,800 --> 00:43:52,320 and then give everyone a share that's the same as their share in the value of 729 00:43:52,320 --> 00:43:56,080 the land as it was beforehand. And usually you have to pass a majority, 730 00:43:56,080 --> 00:44:01,080 which is two thirds of the individuals who have land agree. And also two thirds 731 00:44:01,140 --> 00:44:04,720 of the value of land is voting for yes, in practise. 732 00:44:04,720 --> 00:44:09,640 Many countries have required higher thresholds to do it because they 733 00:44:09,640 --> 00:44:11,110 didn't want public blowback. 734 00:44:11,220 --> 00:44:13,400 But that's the basic principle behind land readjustment. 735 00:44:13,500 --> 00:44:18,440 And that exact think system applies now and is important in Japan, 736 00:44:18,740 --> 00:44:19,340 Taiwan, 737 00:44:19,340 --> 00:44:22,880 and South Korea and versions of it exist in lots of other countries like Spain 738 00:44:22,880 --> 00:44:23,713 and Germany, but 739 00:44:25,210 --> 00:44:30,070 for various reasons it's not used as much in some countries versus others due to 740 00:44:30,070 --> 00:44:31,570 quirks of their various systems. 741 00:44:32,910 --> 00:44:36,840 But the question I wanted to ask Mike is I was really interested that you 742 00:44:36,840 --> 00:44:41,050 haven't yet mentioned an ideological reason except for a brief one where you 743 00:44:41,050 --> 00:44:45,010 said that the Chinese communists were happy to use it because it seemed 744 00:44:45,040 --> 00:44:47,170 consonant with their ideology. 745 00:44:47,230 --> 00:44:50,410 But you haven't mentioned like a deliberate ideological mechanism. 746 00:44:50,670 --> 00:44:55,570 But I'm aware of various American cities that were inspired by the ideas 747 00:44:55,570 --> 00:44:57,130 of Henry George and they thought, 748 00:44:57,630 --> 00:45:02,360 I'm going to do what Raffles did for what sounds like pragmatic 749 00:45:02,360 --> 00:45:06,130 reasons that I'm going to set up a new town and then sell leases to it. 750 00:45:06,270 --> 00:45:11,090 And so effectively people are just paying me in land value because the idea 751 00:45:11,150 --> 00:45:12,360 was a land value tax. 752 00:45:12,860 --> 00:45:17,450 So am I right in thinking that you don't actually have a ideological, 753 00:45:17,910 --> 00:45:21,730 you don't think there was an important ideological reason why Singapore, 754 00:45:21,730 --> 00:45:26,210 Hong Kong and China and then maybe these other countries had lease spaced 755 00:45:27,490 --> 00:45:28,323 tax raising? 756 00:45:28,940 --> 00:45:33,790 Certainly it's not from Henry George that these parts of the world 757 00:45:33,890 --> 00:45:36,470 end up having it, but there is an influence there. As I said, 758 00:45:36,750 --> 00:45:39,790 I think at the beginning, if you look through Raffles, 759 00:45:40,380 --> 00:45:43,270 memoirs and documents that he wrote and letters that he sent people, 760 00:45:43,650 --> 00:45:48,150 the sort of admiration for classic political economists like Adam Smith is quite 761 00:45:48,150 --> 00:45:51,030 clear. Adam Smith, obviously a land value tax advocate. 762 00:45:51,330 --> 00:45:54,990 Now interestingly with Lee Yu, who was a big, 763 00:45:55,380 --> 00:45:57,510 essentially land value tax guy, 764 00:45:57,610 --> 00:46:02,510 or at least someone who said very clearly and publicly many times that 765 00:46:02,510 --> 00:46:07,230 basically the uplift in land value should not accrue to private landowners never 766 00:46:07,430 --> 00:46:09,470 actually really said anything about Henry George specifically. 767 00:46:09,470 --> 00:46:14,110 But the idea is that there's a thesis that he picked up some of these ideas when 768 00:46:14,170 --> 00:46:18,670 he was at the LSE before he was at Cambridge from sort of Fabian 769 00:46:18,720 --> 00:46:23,110 economists who were teaching there at the time, people like Harold Laski, 770 00:46:23,460 --> 00:46:27,510 there's a thesis there. So some of these ideas might have germinated that way, 771 00:46:27,840 --> 00:46:31,670 but it's mostly, I would say a sort of slightly more practical thing. Oh, 772 00:46:31,750 --> 00:46:32,583 I would actually say 773 00:46:34,090 --> 00:46:37,910 one difference there is that Sun Yat-sen founder of the Republic of China, 774 00:46:38,220 --> 00:46:43,070 then Taiwan did encounter the reading of Henry George when he was in the West, 775 00:46:43,070 --> 00:46:46,710 when he was still in exile and became really an actual Georges, 776 00:46:47,230 --> 00:46:50,390 if you read the things he wrote, he was very, 777 00:46:50,390 --> 00:46:54,110 very clearly influenced to that extent. It's the reason why Taiwan is, 778 00:46:54,190 --> 00:46:57,860 I think the only country in the world today where land value tax actually 779 00:46:58,470 --> 00:46:59,630 constitutionally embedded. 780 00:47:00,540 --> 00:47:04,790 It's actually in the founding documents because Sun Yat-sen was a personal 781 00:47:04,790 --> 00:47:07,110 obsessive with this stuff, but I think it's mostly 782 00:47:08,610 --> 00:47:13,070 more incent based and more that these systems have worked over time for the 783 00:47:13,070 --> 00:47:13,950 places that they're in. 784 00:47:14,360 --> 00:47:19,230 Henry George I find really interesting precisely because he's not really like 785 00:47:19,690 --> 00:47:24,310 the Adam Smith view of this is a efficient working 786 00:47:24,570 --> 00:47:28,950 tax. It is difficult to avoid. It's not distortive of other behaviours, 787 00:47:29,050 --> 00:47:32,250 that sort of classical economic view of land taxes. 788 00:47:32,610 --> 00:47:35,050 Henry George is a pure ideologue, right? 789 00:47:35,280 --> 00:47:38,290 He's like a lay preacher more than an economist. 790 00:47:38,290 --> 00:47:40,290 I think his economic thinking is interesting. 791 00:47:40,880 --> 00:47:43,890 Some of it I think is close to some of it, 792 00:47:43,890 --> 00:47:48,360 especially on the exact dynamics I think are quite muddled. 793 00:47:49,230 --> 00:47:53,570 But he's basically a sort of, yeah, he's a firebrand. 794 00:47:54,270 --> 00:47:58,570 And what he did more than any of these other figures was he created this 795 00:47:59,250 --> 00:48:02,050 enormous national movement backing him. 796 00:48:02,310 --> 00:48:06,410 He sort of proselytises very religious terms that he uses when he's talking 797 00:48:06,410 --> 00:48:10,810 about the inequality and the sort of injustice of 798 00:48:11,130 --> 00:48:13,210 concentrated land ownership and land monopoly. 799 00:48:13,550 --> 00:48:17,130 And it's the perfect time in America to do this as a sort of political 800 00:48:17,130 --> 00:48:20,330 entrepreneur because the frontier is closing at this point. 801 00:48:21,030 --> 00:48:22,490 So you have a country, 802 00:48:22,810 --> 00:48:27,810 a continent that was defined by its immense richness in land. The 803 00:48:27,810 --> 00:48:32,410 fact that land was extraordinarily plentiful in America and this period of time 804 00:48:32,430 --> 00:48:36,130 is basically ending just as Henry George arrives with his thesis, 805 00:48:36,710 --> 00:48:39,290 you're having these American cities that are booming in population, 806 00:48:39,290 --> 00:48:42,360 they're seeing sort of urban problems that you would've associated with Europe 807 00:48:42,970 --> 00:48:46,130 previously emerged for the first time. You're seeing slums, 808 00:48:46,130 --> 00:48:47,730 you're seeing massive overcrowding, 809 00:48:48,150 --> 00:48:51,530 people who want to be freehold farmers in the west, 810 00:48:51,560 --> 00:48:54,290 there's no longer any land for them to have. They have to buy it from someone. 811 00:48:54,290 --> 00:48:57,810 They can't just turn up as they had been doing for hundreds of years. 812 00:48:57,950 --> 00:49:02,490 So George I think ends up in this sort of fascinating period 813 00:49:02,910 --> 00:49:06,290 and he becomes, I would say in the late 19th century, 814 00:49:06,510 --> 00:49:11,210 the sort of most prominent and influential political theorist of any type, 815 00:49:11,460 --> 00:49:12,240 right? 816 00:49:12,240 --> 00:49:16,530 He's running this extraordinarily broad social movement that takes in 817 00:49:17,150 --> 00:49:19,330 people in working class social movements, 818 00:49:19,330 --> 00:49:23,970 sort of burgeoning trade union movement in the us. It has a huge appeal 819 00:49:23,970 --> 00:49:24,530 internationally, 820 00:49:24,530 --> 00:49:28,410 particularly in the UK where land ownership is much more concentrated than it is 821 00:49:28,410 --> 00:49:31,450 in the US at this point. So it spreads internationally. 822 00:49:32,270 --> 00:49:35,770 And then as you guys know, but maybe not everyone else does, 823 00:49:35,770 --> 00:49:37,410 and maybe not everyone's heard of Henry George, 824 00:49:37,800 --> 00:49:40,570 this all disappears incredibly quickly 825 00:49:42,390 --> 00:49:46,010 by the sort of middle of the 20th century. It's gone. And frankly, 826 00:49:46,270 --> 00:49:49,690 by the end of the first quarter of the 20th century, it's basically gone, 827 00:49:49,690 --> 00:49:54,210 having been at the end of the 19th century plausibly the most sort of, 828 00:49:55,920 --> 00:49:56,753 well, 829 00:49:57,470 --> 00:50:01,050 the most popular liberal or progressive 830 00:50:02,530 --> 00:50:07,410 theorist and bundle of ideas and ideology that there was anywhere in the western 831 00:50:07,420 --> 00:50:11,360 world and within the space of a few decades, it's completely gone. 832 00:50:12,310 --> 00:50:14,930 So yeah, some of the book is about this, and I find this all really interesting. 833 00:50:15,960 --> 00:50:18,090 What talking about I think is really, 834 00:50:18,090 --> 00:50:21,410 really a completely forgotten vein of history, 835 00:50:21,550 --> 00:50:24,050 not just in terms of the intellectual history that you're talking about. 836 00:50:24,310 --> 00:50:29,170 You already mentioned Sun Yat-sen being heavily inspired by Henry George, 837 00:50:29,550 --> 00:50:34,330 but this was a factor in revolutions and nationalistic movements 838 00:50:35,090 --> 00:50:38,050 throughout the entire late 19th and early 20th century. 839 00:50:38,190 --> 00:50:41,730 So you can go to the Irish independence movement, 840 00:50:41,730 --> 00:50:45,610 which was preceded by a land reform movement that was directly inspired. I mean, 841 00:50:45,610 --> 00:50:50,490 Henry George was a journalist in Ireland for a part of his career and had 842 00:50:50,490 --> 00:50:52,210 kind of deep links with Ireland. 843 00:50:52,710 --> 00:50:55,610 You can see a guy called Michael Davitt who basically everybody who studied 844 00:50:55,610 --> 00:50:58,360 history and I'm an Irish school, will know the name of his very, 845 00:50:58,360 --> 00:50:59,650 very prominent land reformer in Ireland, 846 00:50:59,910 --> 00:51:03,330 who quotes Henry George at length in speeches that he gives. 847 00:51:03,330 --> 00:51:08,290 He goes around both Ireland and England speaking to audiences of people 848 00:51:09,160 --> 00:51:11,570 quoting this. But even if you go to Russia, 849 00:51:12,390 --> 00:51:14,610 we ran an article on sto pin, 850 00:51:15,270 --> 00:51:19,360 and I don't know if anything that sto pin did was directly inspired by George, 851 00:51:19,630 --> 00:51:21,610 but the problem was the same, 852 00:51:21,940 --> 00:51:25,690 which was that you had huge amounts of land holdings that were being worked on 853 00:51:25,690 --> 00:51:27,690 by peasants who didn't own the lands that they were on. 854 00:51:27,950 --> 00:51:32,890 Russia obviously among European countries was very late to change 855 00:51:32,890 --> 00:51:37,360 this and to reform its land holdings like this and ended up actually only really 856 00:51:37,360 --> 00:51:41,130 doing it via the Russian revolution doin did it in a peaceful way. 857 00:51:41,130 --> 00:51:44,450 That was even long after serfdom had been officially abolished, 858 00:51:44,830 --> 00:51:49,170 the peasants in Russia were still effectively living as serfs as tenant farmers 859 00:51:49,270 --> 00:51:53,650 of their landlords. Stolypin developed a kind of vote based system, 860 00:51:54,020 --> 00:51:54,810 which we wrote about, 861 00:51:54,810 --> 00:51:59,730 which is a really interesting piece to allow peasants to basically effectively 862 00:51:59,920 --> 00:52:04,410 deco collectivise their farms and either gain some of the land or 863 00:52:04,800 --> 00:52:09,130 free themselves from the land and move into the cities. But again and again, 864 00:52:09,150 --> 00:52:11,770 you see this, it's only with the Russian revolution and 865 00:52:14,190 --> 00:52:18,970 the Stalin biography that, how have I forgotten the name of the guy? 866 00:52:19,860 --> 00:52:22,160 Can you remember the name of .... Yeah. 867 00:52:23,130 --> 00:52:26,150 If you look at Kotkin's biography of Stalin, 868 00:52:26,210 --> 00:52:29,790 his story of the Russian Revolution is really that there are two revolutions. 869 00:52:29,790 --> 00:52:33,830 There's the one that we all know about the revolution where the czar is killed 870 00:52:33,890 --> 00:52:38,590 and where the communists, the Bolsheviks take charge of the cities, 871 00:52:39,010 --> 00:52:40,860 but also there's a revolution in the countryside, 872 00:52:40,860 --> 00:52:43,110 which is a almost separate revolution. 873 00:52:43,580 --> 00:52:46,110 It's this that enables the Bolshevik revolution, 874 00:52:46,130 --> 00:52:50,990 and this is peasants rising up and taking ownership by force of the 875 00:52:50,990 --> 00:52:51,823 land that they're working on. 876 00:52:52,570 --> 00:52:56,950 And then you have the problem that land readjustment in investment in Germany 877 00:52:57,610 --> 00:52:58,710 was intended to address, 878 00:52:58,920 --> 00:53:03,340 which is you have incredibly fractured land ownership and you have this 879 00:53:03,610 --> 00:53:08,270 declining output of farms because extremely fractured land 880 00:53:08,270 --> 00:53:09,750 ownership is not very effective, 881 00:53:09,820 --> 00:53:13,340 even though they have the new economic policy which could have preserves markets 882 00:53:13,840 --> 00:53:14,990 in the countryside, 883 00:53:15,660 --> 00:53:19,950 Russian output is falling. And so part of the motivation for 884 00:53:20,430 --> 00:53:22,590 Stalin's collectivization of farming, 885 00:53:22,720 --> 00:53:26,290 which ends up killing many millions of people, 886 00:53:26,950 --> 00:53:30,930 is this idea that you can consolidate land holdings and mechanise, 887 00:53:31,270 --> 00:53:35,170 and that will then generate the revenues that Russia needs to industrialise. 888 00:53:36,190 --> 00:53:40,290 The same thing happens in China, the Maoist Revolution. So all across Asia, 889 00:53:40,590 --> 00:53:45,360 the communist revolutions are driven not by proletarians in cities 890 00:53:45,670 --> 00:53:49,970 for the most part, they're driven by peasants in the countryside who want land, 891 00:53:50,630 --> 00:53:54,930 and they are repeatedly promised land. And then a couple of years later, 892 00:53:55,070 --> 00:53:58,330 as in China, they've given the land, they killed all the landlords, 893 00:53:58,330 --> 00:53:59,970 and then five years later they say, oh, you know what? 894 00:53:59,970 --> 00:54:01,210 This isn't actually working very well. 895 00:54:01,510 --> 00:54:04,490 We need to consolidate this land holdings via collective farming. 896 00:54:04,860 --> 00:54:08,090 And then in China it's case you get the great leap forward and many, 897 00:54:08,090 --> 00:54:09,570 many tens of millions of people die. 898 00:54:09,710 --> 00:54:14,330 But it's interesting that what you're describing, all of these roots of Georgia, 899 00:54:15,560 --> 00:54:16,610 even land readjustment, 900 00:54:16,610 --> 00:54:21,090 which is in some ways a peaceful democratic way of doing what Farm 901 00:54:21,110 --> 00:54:25,840 Collectivization tries to do completely unsuccessfully by basically every 902 00:54:26,050 --> 00:54:28,970 standard, but all of what you're talking about is kind of forgotten today. 903 00:54:29,860 --> 00:54:32,650 We just don't really think of land as being this really, 904 00:54:32,650 --> 00:54:36,810 really important driver of political change in recent history. 905 00:54:37,190 --> 00:54:38,023 But it is. 906 00:54:38,750 --> 00:54:40,810 So I absolutely agree with that. 907 00:54:40,910 --> 00:54:45,170 And I think the Russian revolution is the right hinge point to identify for a 908 00:54:45,170 --> 00:54:49,170 number of different reasons. The first of which is it basically makes, 909 00:54:49,590 --> 00:54:51,730 jism is in the grand scheme of things, 910 00:54:52,480 --> 00:54:56,290 it's sort of firebrand movement and it's expressed in these sort of 911 00:54:56,290 --> 00:55:00,210 proselytising Christian terms, but ultimately it's pretty soft, right? 912 00:55:00,880 --> 00:55:05,010 Effectively it was usurped by a much more hardcore 913 00:55:05,880 --> 00:55:10,330 political system where if you started believing what Henry George says about 914 00:55:10,360 --> 00:55:12,530 land, Henry George has this very sort of hard line. 915 00:55:12,790 --> 00:55:14,050 All of this is true for land, 916 00:55:14,340 --> 00:55:17,770 and I'm a complete sort of free trading market liberal for everything else. 917 00:55:18,160 --> 00:55:22,010 This is actually a very hard ideology to sustain among a large group of people 918 00:55:22,010 --> 00:55:24,930 that are much less committed to the specifics of it than you are. 919 00:55:25,230 --> 00:55:30,050 So you end up with Henry George essentially being the handmaiden of much 920 00:55:30,050 --> 00:55:33,650 further left socialist movements in the US both before and after the Russian 921 00:55:33,970 --> 00:55:38,530 Revolution. And essentially the movement is completely ert either by people who 922 00:55:38,590 --> 00:55:43,410 say was sort of much more sceptical about redistribution now because 923 00:55:44,300 --> 00:55:48,450 we're anti-communist and we're not into this anymore. Or by people who say, 924 00:55:48,640 --> 00:55:50,050 okay, well Georgia was all very good, 925 00:55:50,050 --> 00:55:52,050 but I actually prefer being a communist now. Right? 926 00:55:52,510 --> 00:55:55,530 I'm much more left wing than that, and Henry George is right about land, 927 00:55:55,530 --> 00:55:57,570 but also, let's apply that to literally everything else. 928 00:55:58,190 --> 00:55:59,360 The government should own all of it, 929 00:55:59,360 --> 00:56:02,970 or all private ownership should be taxed at a rate of effectively a hundred 930 00:56:02,970 --> 00:56:06,840 percent. That's basically what happens. So it collapses in on itself very, 931 00:56:06,840 --> 00:56:11,170 very quickly. It's already weak in the run up to the Russian Revolution, 932 00:56:11,170 --> 00:56:14,610 but the Russian revolution is basically the death. Now for this, 933 00:56:15,790 --> 00:56:19,650 I'd also say it interacts with the land reform movement quite a lot in a way 934 00:56:19,650 --> 00:56:24,010 that I alluded to earlier, which is someone like Wolf Ladejinskyi, 935 00:56:25,070 --> 00:56:27,770 one of the most prominent land reform advocates ever, 936 00:56:27,770 --> 00:56:32,570 and a driving force behind it in all parts of East Asia. He'd been born in the 937 00:56:32,570 --> 00:56:33,403 Ukraine, 938 00:56:34,070 --> 00:56:37,840 and he had seen the Russian Revolution firsthand, 939 00:56:37,910 --> 00:56:40,840 and he'd seen exactly the promise that you're talking about, Sam, 940 00:56:40,980 --> 00:56:43,170 which is communists coming in and saying, 941 00:56:43,500 --> 00:56:46,570 we're going to take the land away from the landlords, 942 00:56:46,570 --> 00:56:50,610 your eternal oppressor, your ancestral foe, 943 00:56:50,750 --> 00:56:51,730 and we're going to give it to you. 944 00:56:52,630 --> 00:56:56,130 And they do this very briefly before they collectivise everything and ship 945 00:56:56,330 --> 00:56:58,130 everyone after wherever they wanted to send 'em in the first place. 946 00:56:58,310 --> 00:57:00,650 And Ladejinskyi saw this and he said, 947 00:57:00,650 --> 00:57:05,290 there's no way the sort of democratic capitalism has an appeal 948 00:57:05,860 --> 00:57:09,330 to a landless tenant farmer working for someone else, 949 00:57:09,330 --> 00:57:11,450 they're always going to go for the communist option here. 950 00:57:11,790 --> 00:57:14,650 You need to give them something else on top of that. As I say, 951 00:57:14,670 --> 00:57:17,690 in most places it's tried not particularly successfully, 952 00:57:18,230 --> 00:57:19,530 but that's basically his thesis. 953 00:57:19,710 --> 00:57:21,890 You can either have land reform or you can have communism, 954 00:57:22,470 --> 00:57:24,170 but these are the only two options open to you, 955 00:57:24,170 --> 00:57:25,490 and if you don't go for land reform, 956 00:57:25,490 --> 00:57:27,570 you'll get the communism eventually because these people, 957 00:57:27,900 --> 00:57:32,370 these sort of hucksters will convince the peasant class in lots of different 958 00:57:32,530 --> 00:57:34,690 countries to do this. The revolution will come from the countryside. 959 00:57:35,030 --> 00:57:39,290 He thought this because he'd seen it happen himself, right? His family are all 960 00:57:40,980 --> 00:57:44,770 grain barrens essentially. They were the sort of focus of this. 961 00:57:44,830 --> 00:57:47,250 Now he's not a crow landlord person. 962 00:57:47,350 --> 00:57:51,730 He basically thought if you don't have more equitable distribution of land, 963 00:57:51,730 --> 00:57:54,930 you would end up with political entrepreneurs, violent left wing, 964 00:57:55,130 --> 00:57:57,330 political entrepreneurs winning in the end. 965 00:57:58,800 --> 00:58:02,900 Are there any countries today that still have this question unresolved or did 966 00:58:02,900 --> 00:58:07,780 the world just via communism basically resolve in a very unsatisfactory way 967 00:58:08,010 --> 00:58:08,843 this problem? 968 00:58:09,540 --> 00:58:11,270 Well, there's lots of countries. 969 00:58:11,940 --> 00:58:16,830 There's a sort of pivot after the peak of excitement about land reform 970 00:58:16,830 --> 00:58:21,470 towards ideas which are more oriented towards land as an asset 971 00:58:21,730 --> 00:58:24,270 and secure property rights. 972 00:58:25,090 --> 00:58:28,310 So you guys are very familiar with Hernando de Soto and all of that. 973 00:58:28,490 --> 00:58:32,230 He captures this wave of interest later in the 20th century. 974 00:58:33,020 --> 00:58:34,790 There's still a lot of that going on. 975 00:58:34,940 --> 00:58:39,670 There's still a lot of parts of the world where the ownership of land 976 00:58:39,890 --> 00:58:44,230 is actually not very clear and the rights to use it for all the sort of 977 00:58:44,230 --> 00:58:48,590 financial means by which you might use land for loans or anything like that are 978 00:58:48,590 --> 00:58:49,370 not very clear. 979 00:58:49,370 --> 00:58:54,270 So that's still a big deal in large parts of Asia 980 00:58:54,410 --> 00:58:55,243 and Africa. 981 00:58:55,700 --> 00:59:00,510 What I think is equally interesting is the fact 982 00:59:00,540 --> 00:59:04,350 that some of the land reform impetus is killed by the Green Revolution, 983 00:59:05,200 --> 00:59:08,150 which basically exactly as you said, Sam, 984 00:59:08,170 --> 00:59:13,070 in terms of communists thinking that collectivised agriculture would be much 985 00:59:13,070 --> 00:59:15,070 more productive, that you could invest more, 986 00:59:15,070 --> 00:59:17,750 that the use of machinery would be more extensive. Basically, 987 00:59:17,750 --> 00:59:22,570 the green revolution arrives in the post-war decades and 988 00:59:22,570 --> 00:59:25,930 sort of sixties and seventies onwards and suddenly starts to make 989 00:59:27,360 --> 00:59:32,090 land in the form of very small individually farmed small 990 00:59:32,090 --> 00:59:36,850 holdings look lots less attractive because the yields you can get from these 991 00:59:36,950 --> 00:59:37,850 new, but at the time, 992 00:59:37,850 --> 00:59:42,490 relatively expensive strains of genetically modified 993 00:59:42,700 --> 00:59:43,850 crops are much, 994 00:59:43,850 --> 00:59:48,130 much higher and they lend themselves much more towards larger farms. 995 00:59:49,070 --> 00:59:53,810 And Norman Borlaug who invented the dwarf wheat that basically saved 996 00:59:53,850 --> 00:59:58,050 hundreds of millions of lives is quite clear when he talks about it that lots of 997 00:59:58,050 --> 01:00:01,050 people cared about the equity of land holdings at the time, 998 01:00:01,470 --> 01:00:05,690 and he said openly, I don't care about any of that, right? 999 01:00:05,910 --> 01:00:10,050 We need maximum yields so that we can feed people so that they don't die. Right? 1000 01:00:10,790 --> 01:00:13,890 And you see this big clash in the seventies in particular, 1001 01:00:13,960 --> 01:00:18,050 whether the wind is sort of coming out of land reform for other political 1002 01:00:18,050 --> 01:00:20,610 reasons as well, where the sort of argument that, oh, 1003 01:00:20,610 --> 01:00:24,610 we'll have higher yields if we have individual farmers concentrating on the 1004 01:00:24,620 --> 01:00:29,330 plots starts to lose plausibility because of this 1005 01:00:29,330 --> 01:00:33,090 massive revolution in the productivity of agricultural land. 1006 01:00:33,190 --> 01:00:37,650 It becomes clear that actually bigger farms are not necessarily going to be less 1007 01:00:37,650 --> 01:00:39,930 productive, and in fact they're likely to be more productive. 1008 01:00:40,940 --> 01:00:42,240 One thing you mentioned was credit. 1009 01:00:42,850 --> 01:00:45,840 Could you explain what you think the importance is there? 1010 01:00:46,800 --> 01:00:47,633 Absolutely. I mean, 1011 01:00:47,720 --> 01:00:50,360 I think talking to the audience of people who be listening to this, 1012 01:00:50,360 --> 01:00:52,240 they're familiar with the housing theory of everything. 1013 01:00:52,820 --> 01:00:57,320 So I can skip past all of the land use elements of all of the things that 1014 01:00:58,110 --> 01:01:01,880 land use and housing is extraordinarily important to in terms of the downstream 1015 01:01:01,880 --> 01:01:04,560 effects. But when you're looking at it as a financial asset, 1016 01:01:04,560 --> 01:01:09,240 credit is enormously important. Land is a very widely owned asset, 1017 01:01:09,590 --> 01:01:11,560 largely in the form of residential housing. 1018 01:01:12,230 --> 01:01:17,160 It's much more widespread in its ownership than say any form of 1019 01:01:17,160 --> 01:01:20,400 financial asset. If you look at the stock ownership in the US for example, 1020 01:01:20,630 --> 01:01:21,360 there's a very, 1021 01:01:21,360 --> 01:01:24,880 very small proportion of people that actually own the vast majority of the stock 1022 01:01:24,880 --> 01:01:29,160 market. That's not an enormous problem because there's no limit to the size that 1023 01:01:29,440 --> 01:01:32,640 companies can grow to and the number of shares they can list and whatever the 1024 01:01:32,640 --> 01:01:34,920 cap there is on dynamism in general, 1025 01:01:35,100 --> 01:01:39,520 and it's a system for turning dynamism into securities and then you can keep 1026 01:01:39,520 --> 01:01:41,760 selling them. And that's why these big companies expand. 1027 01:01:42,020 --> 01:01:45,040 The sort of restricted nature of land is what changes that a little bit. 1028 01:01:45,040 --> 01:01:46,360 When we're talking about land and credit, 1029 01:01:46,860 --> 01:01:51,600 the easiest way of accessing a loan in the vast majority of the world is 1030 01:01:51,600 --> 01:01:55,000 against land or the property on top of it, and the property on top of it, 1031 01:01:55,000 --> 01:01:58,120 of course, containing the value of the land beneath. 1032 01:01:58,500 --> 01:02:02,880 That's partly because of government fiat because there are all sorts of 1033 01:02:04,030 --> 01:02:06,640 subsidy and assistance schemes that have made this the case. 1034 01:02:06,960 --> 01:02:09,120 A lot of them emerge in the US in the 1930s, 1035 01:02:09,940 --> 01:02:14,800 almost everywhere has favourable terms for lending against land and housing. 1036 01:02:15,390 --> 01:02:19,250 What this means in practise is that if you already own land, 1037 01:02:19,250 --> 01:02:23,130 and especially if the land you own has seen a huge value uplift, 1038 01:02:23,590 --> 01:02:26,970 you have significantly better access to credit in all forms, 1039 01:02:28,370 --> 01:02:32,890 anything that's tied to the land as collateral than other people do. You see 1040 01:02:32,890 --> 01:02:37,330 this hit sort of extreme versions in places where you've had a very, 1041 01:02:37,530 --> 01:02:41,850 very rapid runup in land prices. So Japan in the 1980s is a great example, 1042 01:02:42,220 --> 01:02:44,210 right? Huge, huge 1043 01:02:46,200 --> 01:02:50,880 swell of credit in Japan, huge amount of that tied to the value of land. Now, 1044 01:02:50,880 --> 01:02:54,600 if you happened to think in the early 1960s, oh, 1045 01:02:55,460 --> 01:02:59,520 I'm going to buy some land in the centre of Tokyo, whatever. By the 1980s, 1046 01:02:59,550 --> 01:03:04,440 this is worth hundreds of times what you paid for it. And if you are a company, 1047 01:03:04,860 --> 01:03:09,760 you can use the land as collateral for extraordinarily favourable borrowing 1048 01:03:09,760 --> 01:03:13,880 terms, right? The every time land prices really swell, 1049 01:03:13,900 --> 01:03:17,040 you see things like mortgage standards, 1050 01:03:17,060 --> 01:03:18,840 the standards for mortgage writing weaken. 1051 01:03:19,180 --> 01:03:21,080 You saw this both in Japan and the 1980s, 1052 01:03:21,080 --> 01:03:26,040 you saw it in the UK immediately before the crash in 2008, 1053 01:03:26,040 --> 01:03:29,720 that people will lend you more than the value of the asset you're using as 1054 01:03:29,720 --> 01:03:33,560 collateral because they're so confident that the asset is going to go up in 1055 01:03:33,560 --> 01:03:38,440 price anyway, that they're happy to do 125% mortgage or whatever. So 1056 01:03:38,670 --> 01:03:43,200 basically that connection between credit and land I think is enormously 1057 01:03:43,200 --> 01:03:46,600 important. And it has an interesting macroeconomic effect, 1058 01:03:46,600 --> 01:03:50,560 which is that land and credit have these sort of cycles where they roll together 1059 01:03:51,070 --> 01:03:52,280 land prices rise, 1060 01:03:52,370 --> 01:03:56,840 which releases the financial constraint on the people that own land and allows 1061 01:03:56,840 --> 01:03:57,920 them to borrow more, 1062 01:03:58,650 --> 01:04:02,320 which if you are in a sort of economic upswing can magnify things. 1063 01:04:02,700 --> 01:04:07,320 So you have this sort of effect of sort of 1064 01:04:07,470 --> 01:04:08,400 vicious cycle. 1065 01:04:08,700 --> 01:04:13,680 In some ways it can get out of hand as it did in Japan in the 1980s where it 1066 01:04:13,680 --> 01:04:18,680 becomes vulnerable to any slowdown or change in the assessment of what the 1067 01:04:18,680 --> 01:04:19,720 land will be worth in the future. 1068 01:04:20,620 --> 01:04:23,000 You can see the credit dry up incredibly quickly, 1069 01:04:24,050 --> 01:04:25,480 which is exactly what happened there. 1070 01:04:25,580 --> 01:04:30,480 So I think this is a story that people don't grasp quite enough. 1071 01:04:31,340 --> 01:04:35,240 You can see it in the developing world when it comes to land titling. There's a 1072 01:04:35,240 --> 01:04:40,080 famous experiment in Thailand in the 1980s that the World Bank 1073 01:04:40,180 --> 01:04:40,610 did, 1074 01:04:40,610 --> 01:04:45,600 which formed the basis of some of its work on land titling where they gave 1075 01:04:45,700 --> 01:04:49,520 secure title to a series of Thai farmers and ensure that they had it and 1076 01:04:49,520 --> 01:04:50,680 basically check what happened. 1077 01:04:50,860 --> 01:04:54,160 And effectively what happened is not only does productivity go up, 1078 01:04:54,260 --> 01:04:57,760 not only are they able to access all sorts of things they previously weren't in 1079 01:04:57,760 --> 01:05:02,560 terms of permits and sewers and electricity and all kinds of things, 1080 01:05:02,860 --> 01:05:06,040 but they start to borrow far, far more to invest, 1081 01:05:06,290 --> 01:05:09,200 which they can now do because they own the titles of the land. 1082 01:05:09,340 --> 01:05:12,680 So I think that element of it is probably one of the least discussed, 1083 01:05:13,300 --> 01:05:17,560 and I think it comes down to the attributes the land has, 1084 01:05:17,820 --> 01:05:19,040 the other assets don't. 1085 01:05:22,100 --> 01:05:25,760 Is it possible that a bank will lend me lots of money against land rather than 1086 01:05:25,760 --> 01:05:29,480 against say a car or a factory, 1087 01:05:29,700 --> 01:05:31,080 but without the land attached? 1088 01:05:31,500 --> 01:05:35,880 The reason is that for the banker it's relatively easy to value and because it's 1089 01:05:35,880 --> 01:05:38,600 extraordinarily long lived, it's not going anywhere. 1090 01:05:38,700 --> 01:05:41,520 You don't have to rely on an understanding of the technology, 1091 01:05:41,860 --> 01:05:43,920 you don't have to know anything about a given business. 1092 01:05:44,060 --> 01:05:46,360 If the collateral is there in the form of land, 1093 01:05:46,710 --> 01:05:49,360 then you've got something you're going to repossess. 1094 01:05:49,360 --> 01:05:52,160 Unless you see a really sharp downturn in land prices, 1095 01:05:52,310 --> 01:05:54,440 then there's always going to be something valuable there. 1096 01:05:54,590 --> 01:05:57,800 They only can't take it away with them. It's always going to be sat there. 1097 01:05:58,580 --> 01:06:02,120 So I think this is a huge story. It's partly, again, 1098 01:06:02,120 --> 01:06:06,000 because those subsidies and assistance programmes and all sorts of changes that 1099 01:06:06,160 --> 01:06:10,120 happened in the 20th century that made housing a much bigger problem in a 1100 01:06:10,120 --> 01:06:14,840 problem, a much bigger part of the banking system. But yeah, 1101 01:06:15,030 --> 01:06:18,320 land and credit I think very intimately linked in a way that's not always well 1102 01:06:18,320 --> 01:06:19,153 understood. 1103 01:06:20,060 --> 01:06:23,840 And I have another question for you, which is if you were, 1104 01:06:24,050 --> 01:06:27,320 let's say you were trying to do a version of your book that wasn't the version 1105 01:06:27,340 --> 01:06:27,980 you actually did, 1106 01:06:27,980 --> 01:06:32,920 but was a Freakonomics Mike Bird explores how land affects things 1107 01:06:32,920 --> 01:06:34,000 in ways you don't understand. 1108 01:06:34,020 --> 01:06:36,840 So it's like the land economics version of freak economics. 1109 01:06:36,940 --> 01:06:40,160 Do you think there are any good examples there? One that I often think about 1110 01:06:41,980 --> 01:06:45,640 is a fun one to think about is that shopping malls or shopping centres, 1111 01:06:45,660 --> 01:06:49,840 as we call them, offer have different rents per square foot to different shops. 1112 01:06:50,060 --> 01:06:54,080 So they have shops that they reckon will bring in customers and they have shops 1113 01:06:54,080 --> 01:06:58,760 that they reckon will generate high profits but not bring in customers. 1114 01:06:58,760 --> 01:06:59,400 If they only exist, 1115 01:06:59,400 --> 01:07:01,920 there're on their own the ones that bring in customers they call anchor tenants. 1116 01:07:02,020 --> 01:07:05,720 And in the US it's like the big department stores in the uk they'll be like John 1117 01:07:05,720 --> 01:07:08,320 Lewis will be a classic anchor tenant. People go there, 1118 01:07:08,320 --> 01:07:12,560 but they don't actually make big profits, producer surplus, the anchor tenants. 1119 01:07:12,660 --> 01:07:17,080 And I think it's an interesting example of where the economics of land are 1120 01:07:17,080 --> 01:07:20,080 either rents on bits of land being spilling over to each other, 1121 01:07:20,460 --> 01:07:23,120 the uses of different bits of land spilling over to each other and the rents on 1122 01:07:23,120 --> 01:07:26,160 them being effect to achieve that effectively. A shopping mall owner, 1123 01:07:26,580 --> 01:07:29,960 the property company that owns a shopping mall is charging a land value tax on 1124 01:07:29,960 --> 01:07:31,200 all these different companies. 1125 01:07:31,660 --> 01:07:34,920 And it's an interesting feature that helps you understand if you understand all 1126 01:07:34,920 --> 01:07:38,720 the economics of land is a big feature and also could potentially help you 1127 01:07:38,720 --> 01:07:43,720 understand stuff like why did so many American high streets decline after 1128 01:07:43,720 --> 01:07:48,080 the 1960s say, and shopping malls, which are basically just a high street, 1129 01:07:48,300 --> 01:07:51,840 but one guy owns it and so it's all managed. 1130 01:07:53,580 --> 01:07:55,280 If you don't understand the land question, 1131 01:07:55,590 --> 01:07:57,560 it's quite confusing why shopping malls, 1132 01:07:57,560 --> 01:08:01,840 which are just high streets in a new less convenient location I've taken over 1133 01:08:01,840 --> 01:08:04,000 from high streets. But I think if you understand the land question, 1134 01:08:04,180 --> 01:08:05,160 you realise like, oh, 1135 01:08:07,540 --> 01:08:11,200 the shopping mall has a single owner who can charge a lower rent to an anchor 1136 01:08:11,260 --> 01:08:15,000 tenant to get the people in and then have a nice mix of shops rather than a 1137 01:08:15,050 --> 01:08:18,810 hoteling situation where it's all one kind of shop, et cetera, et cetera. 1138 01:08:18,910 --> 01:08:19,250 Do you think, 1139 01:08:19,250 --> 01:08:22,810 are there any other free economic style insights that you can get from land like 1140 01:08:22,810 --> 01:08:23,643 that one? 1141 01:08:23,940 --> 01:08:26,020 I actually love that case, by the way, 1142 01:08:26,080 --> 01:08:28,730 and I think it's one of the really interesting things when I sort of think about 1143 01:08:28,730 --> 01:08:31,220 whether I support land value taxes in general, 1144 01:08:31,350 --> 01:08:34,180 and I think I am relatively supportive of land value taxes. 1145 01:08:34,650 --> 01:08:37,940 This example of the problems that it causes when you have single ownership and 1146 01:08:39,800 --> 01:08:42,180 the trade-offs there is one of the most interesting, I think, 1147 01:08:42,460 --> 01:08:45,420 arguments less in favour of having land value taxes in general. 1148 01:08:46,100 --> 01:08:47,140 I guess on that basis, 1149 01:08:47,440 --> 01:08:50,540 the two things I would use as sort of Freakonomics points, 1150 01:08:51,040 --> 01:08:55,020 one of which is that I think land had an enormous impact that is almost 1151 01:08:55,020 --> 01:08:57,620 completely forgotten in the American revolution. 1152 01:08:59,040 --> 01:09:02,900 So one of the biggest tensions between British and American elites, 1153 01:09:02,900 --> 01:09:06,580 these emerging American elite at the time is over the use of land and the 1154 01:09:06,580 --> 01:09:11,300 ability to use it for lending and collateral. So you have all of these 1155 01:09:11,370 --> 01:09:15,980 schemes in the 18th century and late 17th century to set up these private and 1156 01:09:15,980 --> 01:09:17,220 public land banks. 1157 01:09:17,840 --> 01:09:22,730 So institutions that will lend money new currencies against land 1158 01:09:23,120 --> 01:09:24,100 in the form of mortgages. 1159 01:09:24,100 --> 01:09:28,500 And this is to try and allay what is a huge problem in colonial America of an 1160 01:09:28,500 --> 01:09:31,980 actual shortage of cash, right? In the early days in colonial America, 1161 01:09:32,040 --> 01:09:34,180 the shortage of cash is sort of ludicrous. 1162 01:09:34,600 --> 01:09:38,460 They're trading in any sort of species that they can get their hands on, 1163 01:09:38,520 --> 01:09:40,810 they'll trade in commodity for commodity. 1164 01:09:40,890 --> 01:09:43,700 It's extraordinarily backwards in terms of a market system. 1165 01:09:44,000 --> 01:09:46,460 And they tried to remedy this with these land banks, 1166 01:09:46,460 --> 01:09:50,380 which were constantly sort of whack-a-mole smothered by the British government, 1167 01:09:50,550 --> 01:09:54,980 which still had the same much older attitude towards land ownership, 1168 01:09:54,980 --> 01:09:58,660 which is that you can't just have guys lending money against land and then a 1169 01:09:58,660 --> 01:10:01,850 banker gets to repossess it. You can't have the Earl of Norfolk, 1170 01:10:01,850 --> 01:10:03,810 whoever that happens to be on any given year, 1171 01:10:04,590 --> 01:10:09,460 mortgaging his entire estate and losing it to some Italian guy who's 1172 01:10:09,460 --> 01:10:14,180 willing to lend him money that the single person's ownership of land is sort of 1173 01:10:14,380 --> 01:10:17,850 subordinated to the family and the history of the place and all sorts of other 1174 01:10:17,850 --> 01:10:19,980 things made it very different in the UK. 1175 01:10:20,680 --> 01:10:25,540 The other one that I'd used is during the land bubble in the 1176 01:10:25,700 --> 01:10:29,340 1980s in Japan, the way that this was 1177 01:10:31,200 --> 01:10:33,810 to the benefit of the Yakuza, 1178 01:10:34,440 --> 01:10:38,060 it was an enormous part of the growth of the Yakuza in the second half of the 1179 01:10:38,180 --> 01:10:43,100 20th century was around its ability to take a cut essentially to find any 1180 01:10:43,220 --> 01:10:46,730 way of getting on the inside track of the boom in land prices. 1181 01:10:47,160 --> 01:10:49,700 So you see them moving into things like construction, of course, 1182 01:10:50,430 --> 01:10:53,810 where they ended up owning a large portion of the construction companies, 1183 01:10:54,040 --> 01:10:57,300 but their most profitable route was a thing. And I'm going to butcher this a 1184 01:10:57,300 --> 01:11:00,730 little bit called jiageya, right? Which was essentially 1185 01:11:02,300 --> 01:11:03,940 coercing, threatening, bullying, 1186 01:11:04,750 --> 01:11:09,660 assaulting the owners who wouldn't give up pieces of land to the companies 1187 01:11:09,660 --> 01:11:10,810 that wanted to possess it, 1188 01:11:11,640 --> 01:11:15,890 for which they would take the cut of the sale price of the land often in the 1189 01:11:16,040 --> 01:11:20,650 5% region to the extent that you have some of these guys by the late 1190 01:11:20,890 --> 01:11:25,890 1980s who are like billionaires in dollars in 1980s, 1191 01:11:25,890 --> 01:11:26,723 money, 1192 01:11:26,910 --> 01:11:30,970 extraordinarily rich people who've gotten out of prison five years earlier 1193 01:11:31,560 --> 01:11:35,130 managing to accumulate the equivalent of a billion in 1980s dollars simply 1194 01:11:35,130 --> 01:11:39,130 through bullying people out of their houses in Tokyo. So yeah, 1195 01:11:39,150 --> 01:11:43,290 that's one of the other fun ones that I think shows some of the extreme 1196 01:11:43,290 --> 01:11:47,210 circumstances you can get in the most ridiculous moments when land prices really 1197 01:11:47,210 --> 01:11:48,043 go ballistic. 1198 01:11:49,020 --> 01:11:51,660 I have one more classic one that may be familiar to people, 1199 01:11:51,680 --> 01:11:54,730 but I think it's such a good one that it bears repeating, 1200 01:11:54,730 --> 01:11:56,620 which is of course that many, 1201 01:11:56,620 --> 01:12:01,540 many historical infrastructure expansions were funded by speculation 1202 01:12:01,540 --> 01:12:04,500 on the land that would result, and it's still done today in certain places. 1203 01:12:05,200 --> 01:12:10,090 So if you are opening a new MTR station in Hong Kong, 1204 01:12:10,800 --> 01:12:15,090 then they most likely will have either used compulsory purchase or careful slow 1205 01:12:15,090 --> 01:12:18,690 buying up or something to get hold of the property around the new station, 1206 01:12:18,690 --> 01:12:21,690 which will then go loads in value and they'll sell it off and then that money 1207 01:12:21,690 --> 01:12:24,170 will then fund the infrastructure investment they did. 1208 01:12:24,230 --> 01:12:27,480 And this has been done in all sorts of crazy ways. For example, 1209 01:12:27,910 --> 01:12:30,560 the ghost acres of the Midwest that were, 1210 01:12:31,940 --> 01:12:34,770 everyone knew this was the best farming land that could ever be found in the 1211 01:12:34,770 --> 01:12:38,180 entire world, but before railways had been built to them, 1212 01:12:38,310 --> 01:12:40,730 and they would have to be incredibly long and expensive, obviously, 1213 01:12:40,730 --> 01:12:44,260 given how far away it is from the American population centres at the time before 1214 01:12:44,260 --> 01:12:45,340 the railways were built to them, 1215 01:12:45,440 --> 01:12:48,660 all the crops would wither and die by the time they would get to the European 1216 01:12:48,660 --> 01:12:53,500 markets that they were intended to go to. So it was all valueless 1217 01:12:53,500 --> 01:12:54,310 land, 1218 01:12:54,310 --> 01:12:58,620 and then the railways were built by buying land around where the railways 1219 01:12:58,620 --> 01:13:00,260 would've gone or many of the railways were built. 1220 01:13:00,420 --> 01:13:04,810 The Kansas Pacific Railroad was built this way and then selling land farmland, 1221 01:13:05,120 --> 01:13:07,770 not because it makes the transport easier to go anywhere, 1222 01:13:07,920 --> 01:13:11,500 but just because your grain can now go and be sold to all the overpopulated 1223 01:13:11,640 --> 01:13:14,380 places in Europe that had famines all the time. 1224 01:13:15,310 --> 01:13:19,020 And this is how Chicago's tram network, 1225 01:13:19,120 --> 01:13:22,770 the streetcar network expanded or how the metropolitan line expanded an 1226 01:13:22,770 --> 01:13:26,380 incredibly resilient way and how Japanese railways build their private railways, 1227 01:13:26,380 --> 01:13:30,220 build their new places now. But something where if you don't think about, okay, 1228 01:13:30,220 --> 01:13:32,500 what's actually going on here? Then it becomes like, 1229 01:13:32,500 --> 01:13:34,180 how can all these countries fund all this infrastructure? 1230 01:13:34,180 --> 01:13:35,260 Where is it coming from? Well, 1231 01:13:35,370 --> 01:13:38,540 it's coming from land value that you can just give out to the people who live 1232 01:13:38,540 --> 01:13:41,500 around it, or you can try and use it to fund investments that benefit. 1233 01:13:42,730 --> 01:13:45,370 Absolutely. And the MTR has got to be the best example of that, right? 1234 01:13:45,560 --> 01:13:46,600 I mean the MTR is like, 1235 01:13:46,690 --> 01:13:49,370 I would encourage everyone here who isn't familiar with this to go and read as 1236 01:13:49,370 --> 01:13:50,190 much of it as you can, 1237 01:13:50,190 --> 01:13:55,010 but the MTR is borderline sort of a mall and housing company 1238 01:13:55,080 --> 01:13:58,930 that happens to have these pipes connecting things that have trains in them 1239 01:13:58,930 --> 01:14:01,560 underneath, right? The trains are so, 1240 01:14:02,350 --> 01:14:05,970 such a fringe part of the actual financing of the company. 1241 01:14:07,190 --> 01:14:10,810 So you have this, it's the world working as it should really, 1242 01:14:12,520 --> 01:14:14,050 I think, and it probably is made easier. 1243 01:14:14,120 --> 01:14:18,050 Hong Kong has all sorts of problems because of the high land price policy stuff, 1244 01:14:18,060 --> 01:14:21,970 but it does allow for this extraordinarily cheap functioning 1245 01:14:22,700 --> 01:14:24,730 successful public transport model. 1246 01:14:25,480 --> 01:14:29,520 I think one of the main things that comes across for me when I was writing the 1247 01:14:29,520 --> 01:14:34,330 book was just you can do sometimes very similar things where you're trying to 1248 01:14:34,390 --> 01:14:39,170 use the value of land productively for its best use. And very small 1249 01:14:39,170 --> 01:14:43,450 variations mean these are either enormously successful or total disasters, 1250 01:14:43,450 --> 01:14:44,290 right? So 1251 01:14:46,770 --> 01:14:50,600 exactly the example you use of the railways and land values 1252 01:14:51,950 --> 01:14:53,970 in America during the late 19th century. 1253 01:14:54,440 --> 01:14:59,370 This is the cause of endless financial speculation and turmoil 1254 01:14:59,370 --> 01:15:01,600 as well. These are enormously profitable, 1255 01:15:01,750 --> 01:15:05,090 but if you're borrowing against the value of the land that you've got the uplift 1256 01:15:05,090 --> 01:15:08,890 and you get it wrong in some way, these were the causes, 1257 01:15:08,970 --> 01:15:12,210 I think 1873/1857, 1258 01:15:12,630 --> 01:15:16,210 big sort of railway speculation elements, these bubbles, 1259 01:15:16,210 --> 01:15:18,730 because you'd have the credit created around the land. 1260 01:15:18,760 --> 01:15:22,410 That doesn't mean it's a bad idea to use the land value to try and finance the 1261 01:15:22,410 --> 01:15:23,243 venture, 1262 01:15:23,470 --> 01:15:28,050 but it is extraordinarily powerful in getting it right versus getting it wrong. 1263 01:15:28,050 --> 01:15:29,170 Matters enormously. 1264 01:15:29,440 --> 01:15:31,480 Well, Mike, thank you very much for joining us. 1265 01:15:31,870 --> 01:15:34,930 If you want to hear more from Mike, you can buy his book, the Land Trap, 1266 01:15:34,930 --> 01:15:37,690 which comes out in November. But is it available for pre-order now? 1267 01:15:37,870 --> 01:15:40,600 And if you want to read more from us, you can go to worksinprogress.co. 1268 01:15:40,710 --> 01:15:41,600 Thanks for listening.