USE VALUE, EXCHANGE VALUE, AND THE NEED FOR PUBLIC
LAND-USE PLANNING
From: Berkeley
Planning Journal, Volume 1, Number 1, Spring,
1984.
Gary E. Pivo
Why should the government be
in the business of influencing how our society uses urban and rural land? The
answer to this question is important to professional city and regional planners
wishing to justify their programs, and to land-use theorists seeking to
understand the forces behind land-use patterns.
The allocation of land can be
conducted by either public planning or by the private market. Both methods have
their drawbacks and advantages. While it is necessary to understand both
systems, as they work alone and together, this essay will focus on the market
approach. Many would like to see the market used as the primary system for
allocating land. In response to this position, this essay will present a
critique of the land market and a justification for land-use planning by
examining the nature of land as a commodity in market economies.
What will become evident is
that the market approach to land allocation generates a number of problems.
Because land is treated as a source of profit in market economies, serious
social conflicts, inefficiencies, and inequities arise. Public policies are
available that can correct these problems. To the extent that one wishes to
correct these problems, public intervention into the land allocation arena is
justified.
Before proceeding, one caveat
is needed. Although this essay constructs a justification for city and regional
land-use planning upon the failures and deficiencies
of the market, this should not be construed as the only justification for
planning. Planning should not necessarily be employed only where the market
fails. Human rights, fairness, ecological balance, and other valid purposes can
also justify government involvement in land allocation.
Land is a commodity in
contemporary capitalist economies (Harvey, 1973). As a commodity, land has two kinds of value—use value and exchange value (
When land is allocated by a
market system, its exchange value often is emphasized at the expense of its use
value. This can occur when the market is operating perfectly or when it is
failing. By analyzing this imbalance, one can construct a powerful critique of
the market approach to land allocation and a valid justification for public
intervention into the land allocation arena.
The Use Value Side of Land
"A commodity is, in the
first place, an object outside us, a thing that by its properties satisfies
human wants of some sort or another" (Marx, 1906).
In contemporary literature,
the use value of a commodity is thought of as the direct utility that one
receives from its consumption. "It has reference to the needs which the
properties of a commodity as a physical artifact can be employed to cater
to" (Giddens, 1971).
The use value of a commodity
depends on the needs and wants of the people who consume it. "Use
value may be defined as the value of a property for a specific use or to a
specific user, reflecting the extent to which the property contributes to the
utility or profitability of an enterprise" (American Institute of Real
Estate Appraisers, 1978). As such, it is a relative concept. "Each
individual and group will determine use value differently" (Harvey, 1973).
In the context of land, it is not simply the physical site attributes of the
land, such as its slope, or the locational attributes, such as its proximity
to a transit stop, that contribute to its use value, but the ability of the
land to help satisfy the needs of a land user. A parcel might be used by a
family for a homesite or by a dentist for an office site. In each case the use
value of the property would differ.
The use value of a site
accrues to the user of the site, but modern writers also discuss use value
"in potential form" (Marx, 1973). For example,
Land is a mixed public and
private good, with positive and negative spillovers resulting from its use
(Steiner, 1977), so the use value of urban and rural land does not only accrue
to the land's occupants. Other people also "use" the land. The
vineyards of
Contemporary planning ideals
suggest that any land allocation system ought to be concerned with use values
in at least two ways. On the one hand, it should protect the use values that
are being enjoyed by existing land users. For example, it should protect
residential areas from invasion by incompatible land uses. On the other hand,
the system should seek an optimal arrangement of land-uses (Harris, 1974). That
is, it should encourage a pattern of land-use that allows the land to generate
its greatest possible use value. Of course these two goals may be mutually
exclusive, and the ability to make trade-offs among them is another necessary
component of a land allocation system.
The Exchange Value Side of Land
Land also has exchange value.
This is the value realized when a commodity is sold or rented. It is the price
that it fetches when traded on the open market (
In contrast to use value
which is generated by the capacity of a commodity to produce actual utility
through consumption, and which is pursued by those interested in enjoying the
benefit from its consumption, exchange value is generated by the capacity of a
property to produce a return on an investment and is pursued by those
interested in these returns. In the case of land, homeowners, realtors,
landlords, developers, and financial institutions are parties in pursuit of
exchange values (
In a competitive market a
landowner will be able to gain a price from a potential land use that is equal
to the difference between the profit that would be generated by the land use on
the site and the profit generated on the least productive site where the same
use could occur. This difference is known as differential rent. Differentials
arise because the price paid for the good that would be produced on the site is
set by the cost of production (including normal profit) on the least
productive site. They are the "surplus profits equivalent to the
difference between individual price of production (on the site) and the ruling
price of production" (Massey and Catalano, 1978).
Monopoly rent arises when
property is sold under monopoly conditions (
Absolute rent, which also
pushes the price above the level of differential rent, arises not on specific
sites with localized scarcities, but over the entire property market when the
investment in property is prevented by the general class of land and property
owners. These barriers to investment can have a number of sources including
general speculation, strict growth controls, and high interest rates (Edel, 1976).
The pursuit of exchange value
in a market system of land allocation creates a number of problems. These
problems are serious enough to bring into question a land allocation system that
relies solely on the market and to suggest the need for some form of public
presence in the land-use arena.
Problems Created by the Market System of Land
Allocation
Under Imperfect Competition
Proponents of the market
approach to land allocation argue that the goal of profit maximization
manifested in the pursuit of exchange values by land owners will generate the
greatest level of benefit, utility, or use values. This argument is based on
the fact that in a perfectly functioning market, the pursuit of maximum
exchange value by a land owner will cause him to sell or rent the property to
the user who can derive the greatest possible use value from the site. This is
because the consumer who can potentially derive the greatest marginal utility
from using the property will offer the highest bid.
The
use that extracts the greatest return from a given site will be the successful
bidder. The outgrowth of this market process of competitive bidding for sites
among the potential users of land is an orderly pattern of land use that is
spatially organized to perform most efficiently the economic functions that
characterize urban life (Ratcliffe, 1949).
But as we have seen, the land
market is not perfectly competitive, so the pursuit of exchange values may not
result in the efficient production of use values.
When the market is operating
imperfectly exchange values can be pursued under conditions of monopoly or
absolute rent. In this situation land and property is no longer allocated to
the user who can extract the greatest return from the site but rather to the
user who can absorb these costs and can afford to pay the high rents. As
As long as the exchange value
of land is based on competitive bidding and differential rents, an argument can
be made that the exchange value reflects the use value that can be gained by
the winning bidder. But monopoly and absolute rents can also arise which cause
the exchange value to exceed the use value of the land,
and the pursuit of exchange value no longer serves to maximize the production
of use values.
Problems Created Under the Market System of Land
Allocation Under Perfect Competition
In addition to the case where
the market system of land allocation does not maximize use values because of
imperfect competition, the pursuit of exchange values will also generate a
number of problems even when the market is operating perfectly.
1. Maximizing
Use Values Causes the Displacement of Use Values
In the interest of exchange
values, a landowner will offer the use of his land to whoever can offer the
highest bid price. According to Edel,
Workers
are expelled from housing to allow the realization of differential rent. The
realization of this differential rent requires direct conflict between potential
users . . . and residents occupying the site prior to the creation of new
demands. The realization of land values is in effect the capturing of land by
one group of users from another" (Edel, 1976).
Condominium conversions are a
perfect example of this process. Old renters often are displaced from their
homes in order to make way for condominium buyers. The use value for the
renters is replaced by use value for the new owners, and the landlord enjoys a
substantial gain of exchange value.
Another example is the case
of farmland conversion to urban uses. A farm owner's interest in capturing
exchange values might lead him to sell the land to a developer or a speculator
who can offer a higher price for the land than it would be worth if it was kept
in agriculture. The use of the property as agricultural land and open space
becomes permanently lost for the farmer and for the citizens who derived use
value from the original use.
So, even in a competitive
market, where the exchange value of a parcel equals the use value that can be
obtained by the highest bidder, the creation of the new use values is born from
the destruction of other use values. As Marx observed, "capitalist
production is in itself indifferent to the particular use values it produces
... It is only concerned with producing surplus value" (Marx, 1973).
2. There is a
Lack of Incentive to Maintain Use Values
Another type of conflict
caused by the separate pursuit of use and exchange values in a competitive
market occurs when a land owner cannot justify maintaining a site because of
its low exchange value, even though the maintenance would be justifiable in
terms of the land's use values. This is common when an absentee landowner
refuses to provide adequate erosion control measures in rural areas because he
will not receive an acceptable return on his investment, or when an inner city
rental housing owner defers maintenance because of the property's low resale
value, "as a consequence, we are throwing away use value because we cannot
establish exchange value" (Harvey, 1973).
3. Effective
Demand May Not Reflect True Demand Because of Current Distribution of Wealth
Another problem is that the
market model assumes the current distribution of wealth. "The key point is
that there is no single 'efficient' allocation of the economy's resources,
instead there is an efficient allocation corresponding to each initial
distribution of resources" (Weisbrod, 1977). An
individual apportions money to land and other purchases within their budget
limitations. The market model assumes that individuals will bid a price for
land that is based on the marginal revenue or benefit that they expect to
derive from using the land in their contemplated use. For a bidder who plans to
use a parcel for a commercial or industrial use, this marginal revenue is
derived in pecuniary terms and can be converted directly into effective
demand. But for a bidder wishing to use a parcel for housing, marginal revenue
accrues in non-pecuniary terms. "If income and wealth are not distributed
in accordance with equity, individual preferences are not properly
weighted" (Thurow, 1973). A poor person may not
have the income to offer a bid that represents the use value that he would
derive from using a site. The result is that "the rich command space, but
the poor are trapped in it" (
4. Social Traps
Prevent Some Use Values from Entering the Market
"Social traps,"
where rational individual behavior does not produce socially optimal outcomes,
even when people would unanimously prefer the socially optimal outcome
(Shelling, 1971), is another case where the competitive land-market will not
provide the greatest possible level of use values. An example would be the
encroachment of office development in an old ethnic community whose existence
enriches the lives of its visitors and residents alike. The bid price that any
single resident of the community would be willing to offer would not reflect
the use value of maintaining a critical mass of community members. The
resident would only offer a price up to the value that he enjoys by living in
the community. The fact that he is an important contributor to the stability of
the whole neighborhood's character would not be reflected in his bid. The
result is that a diffused yet important use value, the neighborhood character,
would not find a voice in the bidding process.
5. The Market
May Not Optimize Use Values across Generations
The problem of
intergenerational equity also makes it difficult for the market to allocate
land in a manner that creates the greatest level of use values. Bid prices
reflect the time preferences of the bidder. The future use values of a site are
not as valuable to a bidder as are those which can be consumed in the near
future. Moreover, future generations have no way of competing with bids made by
the current generation. As a result, a competitive market may not allocate land
in a way which maximizes the production of use values across generations.
6.
Externalities are not considered by those bidding for Use Values
Finally, the use values that
are reflected in individuals' bids do not include the positive or negative
externalities that their use may generate. A polluting cement company, for
example, should include the negative environmental impacts it has on other
users of the site (e.g., its neighbors) in its calculation of the utility it
would derive from using the site for a cement plant. By doing so, its bid price
would be lower and it may be outbid by a use which generates greater use values
when all of the social costs are considered.
These criticisms invalidate
the assumption of the market model of land allocation that the pursuit of
exchange values will generate the greatest production of use values and that
the efficient creation of use values is a smooth process without social
conflicts. The problems of monopoly and absolute rent, displacement of current
uses, ineffective demand, social traps, bias against future generations, and
externalities all work to create situations where exchange values are acquired
at the expense of use values. A theoretical perspective is necessary that
recognizes the importance of exchange values and how their pursuit may
interfere with the production of use values.
If one's goals include the
protection of existing use values and the efficient production of new use
values, then an alternative to the market system of land allocation must be
employed. One alternative is public land-use planning and policy. The final
section of this essay will review some of the policies that are available for
achieving these goals.
Public Policies for Reconciling Use Values and
Exchange Values
For each of the problems
presented above, a brief review of the public policies that could respond to
them will be presented. What should be remembered, though, is that the policies
themselves may generate new problems and should be managed to minimize this
possibility.
1. Displacement
The problem of displacement
of people, who are enjoying use values so that a higher bidder can take their
place, can be addressed by land-use controls, fiscal measures, or the public
purchase of private land. Zoning, development permits, relocation permits, and
subdivision regulations can be used to prevent a potential user from displacing
current use values. Tax measures, that tax away any increment in the value of
land caused by the transition to a new user, or rent controls, that prevent a
landlord from gaining additional exchange value from land conversions, would
remove the incentive for a landowner to turn a parcel over to a higher bidder.
Direct public ownership of property could also be used to remove the incentive
to pursue exchange value to the detriment of the use values being enjoyed by an
existing land user.
2. Monopoly and
Absolute Rents
Policies to avoid monopoly or
absolute rents would cause exchange values to be consistent with the use value
that the winning bidder would receive from the use of a parcel. They can be
directly attacked, through the use of price and rent controls, or indirectly
attacked, by addressing their causes. When monopoly rents are caused by a group
of users being trapped in a limited area with constrained choices, measures
that increase their access to financing, that prohibit discriminatory
practices, and that improve transit in order to give them greater freedom to
live in other locations would be helpful. Absolute rent can be fought by
measures that increase new construction, such as state subsidies and lower
interest rates; anti-speculation measures, such as taxation of capital gains as
income, abolishment of snob-zoning; and investment in public infrastructure in
order to make new land available for development.
3. Lack of Incentive
When use values are lost
because they offer no exchange value, as in the case of disinvestment in
inner-city housing, policies can be focused on the landlord or the land user.
The enforcement of building and housing codes can be used to force landlords to
maintain their property. Policies can also be used that help occupants
maintain their homes or shops. Incomes policy or maintenance vouchers could
give tenants the ability to maintain the use values of their homes.
Unmaintained structures could also be removed from the market through public
acquisitions so that the rents that the tenants can afford to pay will go into
maintaining the usefulness of the building.
4. Distribution
of Wealth
When it is apparent that the
market is not producing use values efficiently because of an inequitable
distribution of wealth, the government can undertake an incomes or voucher
policy that would make it profitable to provide basic needs for all. Zoning and
other land-use controls could also be used to create a pattern of land-use that
would theoretically result from a more equitable distribution of wealth. Public
housing and commercial space projects might also be undertaken to replicate the
pattern of use values that would be generated under more equitable conditions.
5. Social Traps
Social traps, where the
rational behavior of individuals does not lead to a socially optimal production
of use values, arise in a variety of situations; thus, specific measures cannot
be prescribed. However, the general goal of policies in this area would be to
protect the use values that are being enjoyed by a large number of people, but
are not being protected by individual actions aimed at consuming private use
values or acquiring exchange values.
6.
Externalities
Negative externalities could
be internalized into the cost of doing business through the use of performance
standards or pollution charges. Complying with these regulations would reduce
the use value that a polluter would derive from locating in a given area. The
maximum bid price that a firm could offer for a site would reflect its use
value to the firm minus social costs. As a result, less polluting firms might
outbid the polluter.
Where a firm would create
positive externalities, the government could subsidize its rent in order to
allow it to offer a higher bid. Alternatively, the public could use zoning and
other land-use controls to replicate the land-use pattern that would occur had
the bid price of the firm incorporated the use values it would generate for
third parties.
Obviously, a number of
policies are available to reconcile use and exchange values. But the use of
these policies is not without risks. Governance itself is plagued by its own
set of problems (Wolf, 1979). Zoning and other restrictions on land-use can
constrain the supply of land and cause prices to increase. This could result in
monopoly or absolute rents being conferred on some landowners. Rent controls
could reduce the incentive for investment and create scarcity rents. Even
public ownership of land is no panacea, for competition in the public sector over
the best way to use public lands is no less fierce than in the private market,
and it may not necessarily result in the production of the greatest level of
use values. One need only observe the battles over land-use on the public lands
to be convinced of this. Thus, while policies do appear to be available that
can reconcile use value and exchange value, the repercussions of their use must
not be ignored.
Conclusion
The market system of land allocation
that relies on the pursuit of exchange values as a means to secure the
production of use values has been shown to not always produce the greatest
level of use values on urban and rural land. In contrast to the assumptions
imbedded in the market system, that competition among land users determines how
land will be used, and that the result is the production of the greatest
possible level of utility, it has been shown that, under conditions of monopoly
or absolute rents, the pursuit of exchange value will rule the allocation of
land. Even when the market is competitive, it will displace existing use
values, ignore the distribution of wealth, forget about externalities, and be
hampered by other problems.
An alternative is public
land-use planning and policy. But planners will be faced with other problems,
like balancing the pressures to convert a parcel to a use that will produce a
higher level of use values against the desire to preserve the values currently
being generated by the site. But, at least, the choice is available under a
planned system. Under the market approach, the eventual conversion to the use
that offers the higher price is almost inevitable. In this area, planning seems
to give society greater flexibility.
Proponents of the planning
and market approaches generally agree that a primary criterion for the
allocation of land should be its potential for the production of use values.
What the market proponents have forgotten, however, is that land owners are
not passive but rather active participants in the land market. Their pursuit
of exchange value often does not result in land being allocated to the use that
can produce the most use value. On the other hand, what the planning proponents
have forgotten, is that land in any use is already producing use values, and
that its conversion to a use that will produce a greater use value may result
in a more efficient system overall, but will cause the destruction of use
values for certain groups and individuals.
In the end, any system based
on the production of use values cannot avoid the Gordian knot of comparing the
utility levels enjoyed by various individuals. Any method used for cutting the
knot will be debatable. So while a land allocation system geared toward
producing use values is preferable to one in which exchange values "so
penetrate every aspect of social and private life that it exerts an almost
tyrannical control over the life support system in which use values are
embedded" (Harvey, 1973), it must be recognized that a system based on
use values will be faced with enormously difficult problems in determining the
best land-use pattern. Perhaps we should be looking down other avenues besides
utility for ways of judging the goodness of a land-use pattern, such as ethics,
human rights, negotiation, and fairness.
ACKNOWLEDGEMENT
The author would like to
thank Professors David Dowall and Richard Walker for
their guidance during the development of this paper.
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