The mother of all bubbles
from Merjin Knibbe
To produce something, you need ‘capital’. As usual, this concept is not defined too well by university economists. Economic statisticians have stepped in (Jan Tinbergen, Angus Maddison, statistical bureau’s around the world), redefined the concept and measured it. For a number of countries we now know the amount of capital goods and the composition of the value of the stock of capital. This enables us to calculate: ‘net national return on investment’ (Net nominal income/value of capital). This is, unlike ‘normal’ return on investment, not a profit or rent oriented measure but a value added oriented measure (profits plus rents plus wages). When we do this for the Netherlands, we get the following results:
1996 17,8%
2006 14,0%
2007 13,8%
2008 13,1%
2009 12,1%
Source: CBS
What does this decline tell us? Its main cause was not an increase in the amount of capital goods but (explaining 85% of the rise ) a price increase. Land prices increased the most, but other items like buildings and ‘financial capital’ also showed large rises, only ‘consumer durables’ did not get more expensive. To keep this cycle of increasing prices of capital and decreasing returns going, interest rates had to become lower and lower, of course. And the share of ‘capital’ in net income had to become higher and higher: ‘The mother of all bubbles’ – which was not just caused by low interest rates but also by neo liberal policies favouring rent incomes instead of labor incomes like wages and the profits of the self employed and many businesses (I see part of profits, e.g. self employed, as labor income and part of ‘wages’, like bonuses, as a rent. When banks dearly need additional capital while at the same time ‘The City’ in London pays out 17.000.000.000 pounds of bonuses, there is no other logical option).
http://www.cbs.nl/NR/rdonlyres/4ADD0E71-5345-46FE-989E-EE6C93F6705F/0/2009p19pub.pdf
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Real-World Economics Review Blog 
Merjin, sorry to take you to task, but it is really important that you do not conflate land with capital. Land is totally distinct from capital goods. Buildings are capital and I very much doubt whether bricks and mortar saw any increase in value. Labour has to be added in order to maintain the value of buildings.
Carol,
thank you for your comment. You’re right. In the Netherlands, we’ve got an input price index for new buildings (excluding land, including labor and materials i.e. building costs) and a ‘hedonistic’ output price index, which consists of prices of new houses corrected for ‘quality’: location, size and type of buyer (i.e. households or ‘institutional buyers’). The output index implicitely includes land. During the last fifteen years, the deflated (GDP deflator) input index hardly changed, the output index did rise quite a bit. As ‘bricks and mortar’ (and labor) costs did not cause this, it must have been the value of land.
We need to define our terms:
Tools, machinery, robots, commercial vehicles, roads, bridges, buses, railways, factories, wharehouses and offices etc. are all man-made wealth requiring labour and natural resources to create. Economists normally call this “capital”.
Whereas land and natural resources (air, sunshine, the wind, space and natural resources in the ground) are a free gift of nature requiring no labour or capital to produce.
Hence the sentence “What does this decline tell us? Its main cause was not an increase in the amount of capital goods but (explaining 85% of the rise ) a price increase. Land prices increased the most,” – Is plain rubbish.
It’s a bit like saying “The cause for the decline in employment opportunities for labour was only partly a decrease in the number of jobs availasble but the wind velocity of the Outer Hebrides decreased the most”.
Dave,
I agree: we can’t own the sun and the moon. Or the earth. But we do sell the rights to use land, for agriculture or to build houses or roads or to charge rents to somebody who uses it. What I mean (and what statisticians measure) is the price of these rights. I call this ‘the price of land’, as ‘the price for the right to use land’ is somewhat long.
By the way: herewith a URL showing a GIS ustem with church lands in Friesland, the Netherlands, around 1500.
http://194.171.192.4/?db=nederland&ranf=Fryslan&layer=620Kadaster+1832+gebouwen+fryslan&layer=630Kadaster+1832+percelen+fryslan&style=0&style=0&useGM=1&fn=provincie&fv=fryslan
In 1580 the new revolutionary protestant government seized these lands (or in fact: the right to levy rents on the users)to pay for the war against the Habsburgs. At the same time, the catholic ban on charging interest was lifted while somehwat coincidentally roman law had become current in Friesland prior to 1580. This caused the Friesian land market (in fact: market in rights to use land) the most ‘modern’ of about the whole of Europe, and at least more modern than the English land market around 1850.
The interesting thing: for the farmers it did not matter who owned the lands: the church, the government or whoever – they just went on farming.
More on this in Knibbe, M. ‘Lokkich Fryslan. Landpachten, arbeidsloon en productiviteit in Friesland, 1505 – 1830’ (Groningen, 2006).