• Implications of the Economic Calculation Debate for Rural Land Use in Ontario

    pdficon2Lily Yi Wang
    University of Guelph
    Email: ywang34@uoguelph.ca

    Glenn Fox
    ——————-.—–University of Guelph
    ——————–.—-Email: gfox@uoguelph.ca

    Land use planning is a pervasive feature of rural life in Canada, as in most OECD countries. Various levels of national, subnational and local governments are involved.

    Regulations and by-laws on land use seem to be getting more and more specific. Grass roots organizations are emerging as part of a social reaction to the encroachment of land use planning on land owner rights.

    In contrast, few economists still believe that central planning is a viable mode of social organization, especially after the dissolution of the Soviet Union in 1989 and China’s economic transformation since 1978. Most economists today consider the market economy to be superior to central planning as a means of achieving economic efficiency. In land use policy, however, we are witnessing a general trend towards central planning of land use in many jurisdictions

    We argue that this paradox is a consequence of an artificial intellectual separation. Theorists and practitioners of rural land use planning seem to operate without regard to the findings of the theoretical and practical literature on the economics of central planning. And contributors to the literature on general economic central planning have not explored the implications of their findings for local and regional land use planning. The purpose of this paper is to provide some preliminary linkages between two communities of thought and practice.

    Background: The Economic Calculation Debate

    The theoretical economic calculation debate occurred largely between 1920 and 1940.  Lavoie (1981) argued that participants in the economic calculation debate adopted one of two competing and incompatible paradigms of economic theorizing. The economists who ended up adjudicating the debate generally all adopted one of these paradigms, making the adjudication less than impartial. The debate focused on the challenge posed by Mises, who argued that without market prices for goods of higher order, it is impossible to know relative scarcity of different components of the capital structure, and therefore allocation of those goods of higher order among their competing employments will be arbitrary (Lavoie, 1981). Mises was later joined by Hayek and Robbins, arguing that lacking market prices for goods of higher order, rational calculation is unfeasible under collective ownership of the means of production Lange and Lerner, among others, argued that a stimulated market model could be used to guide resource allocation under collective ownership of the means of production, making central planning feasible. Hayek refuted Lange’s model by emphasizing the knowledge problem: the impossibility of gaining these crucial data for centralized calculation. By the mid-1950s, the consensus view of academic economists in the UK, the United States and Canada was that Mises and Hayek lost the debate. Samuelson suggested in his Economics (Chapter Thirty- two, 1988) that the economy of Soviet Union was no less efficient than the United States.

    Public perception, however, began to change after 1989 when the Berlin Wall came down and western country journalists began to get an improved understanding of the economic chaos that had been hidden behind the iron curtain. Somewhat later, and generally grudgingly, academic economists began to consider the possibility that the prevailing consensus on central planning had been wrong, and some have even began to wonder if Mises, Hayek and Robbins had been correct. The consensus view among academic economists in the west today, and perhaps in society generally, is that central planning as a mode of social organization is not viable, from both theoretical and practical perspectives. However, the growing trend on rural land use planning really imposes an interesting question: why is land so special?

    Existing Rationales of Rural Land Use Planning

    Barlowe (1985, Chapter 17) explores the nature, types, rationales, and the processes of land use planning. He defined land use planning as the “conscious direction of effort toward the attainment of a rationally desired goal”. To Barlowe, the rationale of planning in general is to avoid chaos– to avoid individual’s conflict interests, exploitation, and less optimal social welfare. Implicitly, Barlowe seems to accept the central planners’ assumption that there is such a thing as a unified rationally desired goal, that planners can know what this goal is and have the capability of allocating land use in a manner consistent with the realization of that goal. Barlowe argued that as long as land owners work towards common goals in productive use of their land, there is no need to interfere, however, if the use of land has direct conflicts with members of the society, land use planning is needed.

    Frankena and Scheffman (1980) examined the market failure rationales that had been offered in support of provincial rural land use policies in Ontario up to 1980. They identified five general categories of market failure: market power, externalities, public goods, uncertainty, and, incorrectly, distortionary government policies. This last item is actually a category of non-market failure, not market failure (Wolf, 1979). According to traditional market failure theory, an agent is defined to have market power if he or she is not a price taker. Typically, this category of market failure is associated with the theory of monopoly and the theory of imperfect competition and is they concluded that it was of limited relevance for the rural land market they were studying. Externalities, a second category of market failure, arise when one person imposes costs (negative externality) or bestows benefits (positive externality) on another person or persons without the consent of the affected person(s). Positive and negative externalities can also create difference between marginal social costs and prices. In rural land markets, externalities have been cited frequently as sources of conflicts over amenities, pollution and congestion problems. Their third category of market failure was public goods. Public goods are defined as goods that are non-rival in consumption and for which exclusion of non-contributors is either costly or impossible. Public goods are associated with free-rider problems. Frankena and Scheffman (1980) argued that agricultural land has some characteristics of public goods, such as benefiting passers-by for providing open-space. Uncertainty is another potential source of market failure, mainly because there are not sufficient markets or institutional settings for risk pooling.

    Implications of the Economic Calculation Debate

    One of Frankena and Scheffman’s (1980) major findings was that rural land use policies in Ontario had beend designed without regard to economic evidence and concepts. They pointed out that rural land use policies during the time period they studied did not seem to be based on empirical studies and that many policy rationales were not justified economically. For instance, data showed that only 1% of the good farmland was converted to built-up use, and rural to urban conversion accounted only 10% of the decrease in census farms from 1951 to 1976. Also, they pointed out that policies generally assumed that there was a fixed supply of farmland, which was incorrect[1]. Policies also generally assumed that land that is best suited for farming should be kept in farming, which is a conclusion resting on a theory of absolute, not comparative advantage.

    While they were generally critical of what they saw as the weak economic foundation of the land preservation policies that they studied, Frankena and Scheffman (1980) did not mention the economic calculation debate. In contrast, in the U.S. debate on rural land use planning, Pasour (1983) identified four important implications of the debate, which are the “use of knowledge in land-use decisions”, “problems due to time”, “public choice considerations”, and “inflexibility of land-use controls”.

    For the first implication, Pasour (1983) was critical of what had come to be called “scientific management” as a way to manage natural resources. He pointed that Hayek’s (1945) distinction between scientific knowledge and what Hayek called the knowledge of the particulars of time and place meant that so-called scientific management could not deliver on what it promised.

    Pasour (1983) acknowledged that a common rationale for land use policies is that there is an inadequate incentive for individuals to preserve farmland preservation because the benefits will only be realized in the future. Pasour (1983) argued that in fact expectations are reflected in current asset prices, including land prices, so the current land price can reflect the demand of this piece of land today and expected demand in the future. Demsetz (1967) made a similar point that current land owners serve as brokers for the interests of future generations. In addition, Pasour pointed out that, in the absence of market prices as a guide, land use planners would have to guess at the needs of future generations in any case. Pasour (1983) identified a systemic incentive problem arising from the separation of authority and responsibility which results in planners not bearing the costs or the benefits arising from their decisions.  Misallocation of agricultural land thus will not have negative consequences for the government. In this case, there is no reason to believe the central planner will make efficient allocation decisions.

    Lastly, Pasour (1983) noticed that planners and the elected officials who direct them are motivated by self-interest, and decisions are often short-run oriented due to the pressure to seek re-election. He points out that this contradicts to Hayek’s view of a rational economic calculation, which must take the interests and preferences of all affected parties into consideration.

    Implication of Economic Calculation Debate for Rural Land Use Policies in Ontario

    Rural land use policies are a contemporary example of central planning. In Ontario, there are several influential rural land use policies aiming at farmland conservation. The Greenbelt Plan (2005), Niagara Escarpment Plan (1990) and the Oak Ridges Moraine Conservation Plan (2002) are scheduled for review in 2015 (Greenbelt Plan, 2005). These policies were designed to protect agricultural land in Ontario, as stated in the Greenbelt Plan (2005): “The Greenbelt is a broad band of permanently protected land which: protects against the loss and fragmentation of the agricultural land base and supports agriculture as the predominant land use”. What makes the planners want to permanently protect Agricultural land in Ontario?

    Ontario’s land use policies rely on similar rationales discussed by Pasour (1983). One rationale is that Ontario is losing agricultural land, especially the class 1 land[2]. Both Ontario Farm Trust (2013) and Ministry of Municipal Affairs and Housing (MAH, 2010) quoted from a report by Hofmann (2001) that from 1971 to 1996, 18% of class 1 farmland was lost in Ontario. Ontario Farm Trust (2013) also quoted from a report by Agricultural Odyssey Group (2002), saying that “Agriculture needs the most productive farmland to provide the base for a strong rural economy”. The fear of losing productive land is certainly one rationale for the policies. However, a subsequent report by Hofmann (2005) concluded that only 11% of class 1 farmland was lost in Ontario from 1971 to 2001 based on a more accurate method.

    The Ministry of Municipal Affairs and Housing, Ontario Farm Trust, and the Agricultural Odyssey Group seem to be unaware of the implications of the subjective theory of value, and the of the concept of comparative advantage. A piece of land can be prime land for agriculture, but it can also be prime land for housing or industries. The determination of absolute advantage in one employment does not solve the allocation problem for a factor of production.

    The value of land is subjective to the person who wants to use the land a particular way and enters a transaction. The land buyer may find a class 1 land more productive for uses other than agriculture, and will generate higher returns. In this case, he or she will offer a much higher price than the price he or she will offer if the land is only used for agricultural purposes.. This is the similar to the knowledge problem arisen in the scientific management movement in the Unites States discussed by Pasour (1983).

    Menger’s (2007) theoretical treatment of goods of higher order explains that the value of goods of higher order, like farmland, is derived from consumers valuations of goods of the first order. Land prices reflect the expectation of the value it can produce. Goods of higher order generally have multiple potential uses. In Mengers’ terms, they are generally not perfectly specific nor are they perfectly general. Interaction of competitive buyers and sellers is the process through which subjective values and dispersed knowledge interact to reveal comparative advantage. Of course, entrepreneurs are not infallible. As Pasour (1983) suggested, however, private entrepreneurs will be responsible for their losses, and will correct their mistakes in the future.

    A Market Oriented Rural Land Use Planning

    Seeing the flaws in government rural land use planning, and the advantages of a free market, a reform of planning is needed to solve the rural land use problems. Mark Pennington (2002) proposed a market based planning system which can incorporate the advantage of competitive market, entrepreneurial discoveries and be consistent with property rights. Pennington (Chapter Six, 2002) suggested that property rights actually can be separated to a bundle of rights, so the owner can only sell some rights associated with the lands, which is defined as restrictive covenants. Pennington argued that restrictive covenants can promote developers to consider the opportunity costs of including things not permitted, and consumers interested in buying properties weigh the benefits and costs of limitations on these lands. In this way, the market incentive allows people who value well protected lands to pay. He argued that the key to property rights then becomes that one must pay to have control over other people’s property.

    Pennington (2002) also advocated the idea of proprietary community, which means the people in this community voluntarily contract to give up control over their property to agree with principles of governance specified in the contract. However, he warned that the best way of mixing individual and common property rights needs to be discovered through trials and errors, and the market will give the answer.

    Pennington’s idea leaves a lot of room for rural planning. Instead of taking rural land in the name of protection, governments can sell public natural lands with restrictive covenants.

    Instead of imposing regulations on farmlands, local governments can promote the idea of common proprietary by indicating the benefits of a better environment, which can be a higher price of the property, and let farmers make decisions. And more options involving contracts and market process can be developed in the rural land use planning context.

    Conclusion

    In this paper, we identify a paradox in land economics by presenting a linkage between the economic calculation debate and its implications for rural land use planning. The more restrictive rural land use policies in Ontario today reflect planners’ unawareness of the economic calculation debate or the findings in literature. The implication of the economic calculation debate applies to Ontario, and it will be beneficial to future policy reviews. A more market oriented land use planning is an alternative way for the current planning. Future study of this approach in the Ontario context will be helpful to increase efficiency in land use planning in Ontario.



    [1] Among other things, the effective supply of agricultural land can be enhanced by draining wetlands, which happened historically in Ontario in Lambton, Kent and Essex counties, and also at the Holland Marsh.  In addition, tile drainage has removed production limitations associated with excessive spring moisture, effectively increasing the supply of higher productivity agricultural land in the province. Irrigation can have a similar effect in selected situations where moisture during the growing season is limiting.

    [2] According to Canada Land Inventory, land is categorized according to its capacity of agriculture. Class 1 land refers to land, which has no limitation on agriculture, while class 7 land is incapable of agriculture.

    References

    Agricultural Adaptation Council (2002), The Odyssey Report, Agricultural Odyssey Group.

    Barlowe, R.(1986) Land Resource Economics — The Economics of Real Estate, NewJersey: Prentice-Hall.

    Demsetz, H. (1967) “Toward a Theory of Property Rights”, The American Economic Review, 57(2): 347-359.

    Frankena, M. W. and D. T. Scheffman (1980) Economic Analysis of Provincial Land Use In Ontario, Toronto: University of Toronto Press for The Ontario Economic Council.

    Government of Ontario (2005), Greenbelt Plan, Ontario Ministry of Municipal Affairs and Housing, Land Use Planning Branch, Toronto.

    Government of Ontario (2002), Oak Ridges Moraine Conservation Plan, Ontario Ministry of Municipal Affairs and Housing, Land Use Planning Branch, Toronto.

    Government of Ontario (1990), Niagara Escarpment Planning and Development Plan, Ontario Ministry of Municipal Affairs and Housing, Land Use Planning Branch, Toronto.

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