The Institutional Analysis of Real Estate Markets: The Economic Value of Land

Abstract

Over the last century, the discipline of economics has witnessed the adoption of the so-called ‘institutional approach’. More recently, the “old” Institutional Economics (Veblen, Commons, Mitchell) is being distinguished from the “new” Institutional Economics (Coase, North, Williamson). Within this context, it is important to ask whether the institutional approach is offering anything fundamentally new to economic methodology, or whether this approach has simply broadened the scope of economics in order to enlarge its explanatory power. Although there is awareness within the study of economics that it is neglecting the social structures, it is clear that the discipline has not been able to incorporate these structures into itself. What is missing within Institutional Economics, above all, is a unifying set of principles, and this absence indicates a methodical problem. In this paper I propose to establish the methodical incompleteness of the institutional approach in economic theory on the basis of the philosophy of H. Dooyeweerd (1894-1977). As I see it, the fundamental problem of institutional economics has been that it has not recognized that economic norms must be connected with the structures of individuality. Basing my argument on Dooyeweerd’s “new theoretical thought” (1953-58), I propose a number of sociological principles upon which to base a relationship between economic norms and the structures of individuality. After establishing these sociological principles, I apply them to the question of the economic value of land. At present, it is the so-called ‘residual method’ which is primarily used to reckon the economic value of land or as the case may be the market price of land. This method is essentially based on Ricardo’s differential land-rent theory. The starting point of the modern approach is that the total residual value of the production-column will settle at the bottom. Thus in the process of establishing a price, the production factor “land” is considered to appropriate the residual value. Nevertheless, empirical analysis suggests that the residual value is being divided among a number of different production factors. The question then arises as to whether there is a conceptual paradox within the present method of land valuation. I propose that this paradox can be overcome by taking into account the sociological principles that lead to the emergence of the different social meanings of land. When this emergence is understood, it becomes clear that there are a number of different norms of economic valuation. Once these emergence and norms are properly taken into account, a more consistent methodology of land valuation can be established.