Cantillon's Land Calculations

Richard Cantillon spends several passages discussing land in his book on political economy. One thing he brings up is the division of income between labour, owners and government, where each actor receives one third as a general rule. Personally, I've come across this same line of thinking as part owner of a large family enterprise. Taxes, labour and capital gains were seen to be divided optimally when each party received one third. Any other division was considered excessive and ultimately unsustainable.

This means that this general rule on how to divide income has been around for at least 300 years, and is likely to be around for many years to come. It's therefore reasonable to use this rule when looking into investment opportunities into productive capital.

Cantillon is clear about the fact that owners of land and capital rarely work directly with what they own. It's not the land owner who works the land, and it's not the factory owner who works the machines. This too is still true for large scale agriculture and production. It's therefore likely to persist into the future.

What we find in Cantillon's book is therefore a way to calculate the value of enterprises. Only when the division between taxes, labour and capital income balances out equally do we have a sustainable model. Cases where the division is lopsided cannot be expected to last over time. If there's little capital income to be had, prices must come down before there's any sense in investing. Furthermore, conditions must be stable, or be expected to improve over time.

We can view productive land as an income generating alternative to gold. While gold and land will move in parallel over the long term, only land produces income. However, during times of excessive taxation or political unrest, gold will outperform land. Furthermore, land is not a very liquid asset, so it's senseless to invest in it without political stability and a relatively good compensation in terms of income.

When investing in productive land, we need to find out what we get in income from it if we rent it out to a farmer. Only when that equation gives us a reasonable return on our investment is it sensible to buy, and this is no less true if we intend to work the land ourselves. Our labour should not come as a compensation to cover up a bad deal.

Land can be further developed by catering to tourists, or by producing end products like wine and beer. However, this too must be left out of our initial calculations. If expected income is mainly from tourism or wine production, we're better off buying a hotel or a winery. Land has to be income generating when leased out to a professional farmer. Only then is it a worth while investment.

Vineyard 

By Sanjay Acharya - Own work, CC BY-SA 3.0, Link