ISET Economist Blog

Land – Who Cares?
Wednesday, 14 December, 2011

Classical production theory knows three so-called “production factors”: labor, capital, and land. One needs a certain amount of each of these factors in order to set up a production of whatever good. Then, in the 20th century, it became common to not count land as a separate production factor anymore. Today, we usually speak about labor and capital, with the understanding that some of the capital is the land on which the production facilities are built.

On the surface, this looks just like a pure change in terminology. Yet in fact, it reflects an underlying economic development which could be called the “marginalization of land”. Let me explain.

Thomas Malthus’ famous theory predicted that famines and mass starvation were inevitable in the face of exponentially growing populations and constant food production due to the fixed supply of land. Up to 1798, when his theory was published, this analysis was roughly correct. Investigations into demographic history show that during ancient and medieval times famines occurred in regular intervals. The industrial revolution, which started in England in the middle of the 18th century, put an end to this. Food supply (i.e. land) was no restriction for population growth anymore, and consequently, the population soared. For 250 years, the productivity gains in the agricultural sector are always higher than needed for sustaining the (increased) population, making famines a thing of the past in the developed world. For the prosperity and power of a country, the amount of land it possesses has become more or less insignificant.

In modern economies, in which agriculture usually accounts for less than 5% of the GDP, the land is virtually never a limiting constraint for higher living standards. Energy, human capital, technological know-how, a stable business environment -all these factors and many others are crucial for modern production, but the land isn’t. There is always enough land available to erect a production plant or a service facility.

Surprisingly, in geopolitical thinking, the marginalization of land hasn’t occurred. In fact, most countries are fighting for land as if it was still as important today as it was in agricultural times. An example is China’s occupation of the Tibet and the Uyghur regions. What does China earn from dominating these provinces besides internal unrest, terrorism, and being a cruel oppressor in the eyes of history? Note that the moral repugnance of such occupations is not my main point here. I am rather asking the question of rationality. Why does China want to control a poor and underdeveloped region like Tibet?

Similarly, there is Turkey. Why are the Turks keeping their grip on the Kurdish East Anatolia? Why are rational politicians, elected by rational populations, concerned about the possession of dusty, unpleasant plains, in which retarded villagers and nomads stick to primitive traditions and rites?

Alleged raw material resources, sometimes claimed to be the true reason behind pre-modern strives for land, are in fact no explanation. Firstly, the fixation on land can be similarly observed in cases where raw materials play no substantial role (like in the two examples mentioned above). Secondly, possession of raw materials has usually done no good for the country which harbored these resources. The absence of significant amounts of raw materials is at least no growth restriction (see the examples of Japan and many Western European countries).

Geopolitical thinking needs to abandon the “doctrine of land”. In almost all disputes between countries, the land is completely useless for the well-being of the involved countries. If the land was important, why is the living standard not highest in Russia, which is the largest country on earth? Why is there no immigration pressure from Holland – which has a high population density – to Russia? In fact, the migration pressure goes in the other direction.

Why do I raise this topic in a Caucasus blog? Well, when I recently dared to mention to a Georgian friend that Georgia should consider just letting go of certain regions and making no fuss about it, this friend almost killed me. I was taught that these regions belonged to Georgia “since time immemorial” and that letting them go would be a betrayal of the Georgian people. Facing those arguments, there was no point in mentioning that ongoing secession conflicts drive away tourists and that they spoil investor climate. Likewise, it was useless to point at the military expenditures which directly reduce the Georgian living standard.

The same could be said about a certain regional conflict between Armenia and Azerbaijan.

Some countries have understood that land is just irrelevant. As a result of the Second World War, Germany lost about 30% of its land. Whenever there is an economic crisis in Russia, there are voices that call for selling the Kӧnigsberg (Kaliningrad) to Germany. This will not happen for two reasons. Russian nationalists are (like all nationalists) staunch adherents of the doctrine of land, and they would never allow giving Kӧnigsberg back to Germany. Yet even more important, there is no doubt that Germany does not want to take Kӧnigsberg back, even if it was for free. The Kaliningrad region has severe social and economic problems, and its integration into Germany would make the country just much poorer. For modern people, this counts more than the fact that Kaliningrad was a German city since its foundation in 1255 and remained so until 1945 (“times immemorial”).

Western Europeans have simply understood that it is far better to control a small but rich country than a poor but large one. This may have decisively contributed to the absence of war in Western Europe within the last 65 years.

For Armenians, Azeris, and Georgians, there is a lesson to learn from Western Europe.

The views and analysis in this article belong solely to the author(s) and do not necessarily reflect the views of the international School of Economics at TSU (ISET) or ISET Policty Institute.