4
when he purchased the land. The capital gain represents an
increase in the sum of financial assets which ideally represent
the counterpart of the land. There is thus an increase in the
value of assets which represents saving. If this statement is not
easy to accept for traditional Keynesian theory this is due to the
idea that saving should represent something real like
reproduceable capital and not the finance of a mere change in
value. But in fact this idea is anyhow abundoned since it is
recognised that budget deficits require saving to be financed.
We have only talked about hausse so far but the case of
baisse might be thought to be symmetrical. We assume again finance
by bank credit. The vendor receives less than he needs to pay back
the debt he incurred when he purchased the land. The remaining
debt - his capital loss - represents dissaving. If he repays it
from his own funds the total bank credit outstanding will be
reduced which involves a credit restriction. If he is not able to
repay when he is pressed ( which may happen in view of
expectations produced by the decline in values ) then he will
become insolvent. This implies an assymetry of the effects of boom
and bust.
When there is general inflation capital gains may be illusory
in so far as they do not enable the owner to consume it as long as
he wants to keep his wealth intact. The gain must therefore be
measured in terms of purchasing power of consumer goods or
possibly in terms of wage units ( power to purchase labour for
purpose of investing in reproduceable capital ).
III. RICARDO'S RENT.
If land is valued at the price paid when it last changed hands
then the value of land consists of the accumulated capital gains