Henry George proposed that land speculation creates boom-bust cycles. I propose a real-assets model of economic crises, loosely based on George’s theory, in which land prices play a central role. Swings in land prices affect the entire economy by three mechanisms: construction on marginal sites, partial displacement of circulating capital by fixed capital investment, and the over-leveraging of bank assets. I analyze the crisis of 2008 in these terms, along with other examples of sudden economic contractions in U.S. history, recent European experience, and global examples over the past 20 years. I examine conditions in China in 2014, and show that a recession there is likely in 2015, because its banks are over-leveraged with large-scale, under-performing real estate loans. Finally, I explore alternative methods of preventing similar crises in the future.
Read the full article from The American Journal of Economics and Sociology, March 2015.