Value, Prices, and Controls
A Glance Towards Housing
Subjective Value and the Margin
In as much as we are conscious of our wants and needs, we place a value on the goods available that we expect will satisfy them. In this way, we say the value of a good is subjective in that we assign a value to it based entirely on how well it satisfies our wants. That is not to say certain objective characteristics do not make a good qualitatively better or worse at a specific task, only that the value we confer on the good is not an inherent characteristic of the good itself.
For example, the value we put on certain housing arrangements changes as our wants change. When young adults move into cities, they may choose to live in a studio apartment, as they value those wants satisfied by having additional cash more than the satisfaction conferred from an additional bedroom. Said in another way, while one-bedroom apartments are certainly available to them, they value the additional bedroom less than the value of the additional cash.
One striking example of this principle are the students every year who voluntarily choose on-campus housing in order to live close to campus activities and culture. They value these aspects more than additional square footage for private bedrooms, bathrooms, kitchen, and in many instances air-conditioning.
Another is from my own life. I decided in April 2017 that I wanted to both live alone and live within walking distance to work in downtown Washington, DC. The amount of money I had to pay for these wants meant that I had to forego significant square footage, landing on a ~300 sq. ft. studio apartment on 12th and N St NW. Actually, in order keep my total housing bill down and meet my savings goals, I also gave up an in-home internet connection, air-conditioning, and switched to an a la carte cell phone plan.
Whether it is on-campus housing, apartments or condos, tents or tepees, or tiny homes, the value conferred by individuals on these arrangements is based entirely on the goods ability to satisfy their wants. This analysis can be applied to absolutely any good in the economy and is the basis of what economists call marginal analysis.
Voluntary Exchange and Price
A voluntary exchange involves at least two parties who value what they receive through trading more than what they must give up. Almost by definition then, exchanges are mutually beneficial at the time they are made, otherwise it would be hard to imagine why exchanges take place at all.¹
For example, when I exchange 99 cents for a gallon of water, I value the additional gallon of water more than the $0.99 I gave up. Conversely, the seller values the additional $0.99 more than the wants left unsatisfied by having one less gallon of water in their stock. The point is, prices are not arbitrary — prices convey important knowledge about the trade-offs necessary to complete an exchange. Nor are prices volitional — if the seller raised the price above what I valued an additional gallon of water, say because he didn’t like me, the exchange would never occur, the seller would be left without money, and I without their gallon. This unmet want of mine would not only send me on a hunt for better prices, but other sellers would be incentivized to enter the market to provide water. Large-scale volitional pricing (by either buyer or seller) is not sustainable in a market economy, as people who restrict trade for non-economic reasons will inevitably have less revenue or endure higher economic costs than those who do not practice the same discriminatory behavior.
In fact, price discovery is a key feature of the market process and is the preferred method by economists for allocating resources to their highest valued uses.² Generally speaking, systemic analysis has been the preferred methodology for analyzing exchange and prices in an economy, regardless of resulting social prescriptions, as summarized by a prominent economist:
The animistic fallacy is rejected decisively by such ideologically disparate figures as Adam Smith and Karl Marx, both of who analyzed in systemic terms. Smith had no faith whatsoever in the intentions of businessmen, whom he characterized as mean and rapacious, but argued that the characteristics of a market economic system would lead to beneficial results which were no part of the intention of those acting within the system.³
Much like marginal analysis, the logic of the market process knows no exceptions. A system based on voluntary exchange means suppliers cannot make money without providing others in society with valuable goods. This constraint on exchange incentivizes suppliers to produce goods buyers value. If one supplier does not accomplish this, buyers being fully aware of the fact their wants are not met will take it upon themselves to find those that do. The prevailing market prices are then used by all of society alike as a signal whether to enter or exit various markets or otherwise plan their economic behavior.
Price Controls, a Primer
Price controls have been used by coercive institutions throughout history, commonly placed on markets for food, labor, and housing. While the effects are the same the justifications seem to change to fit the political arena of the time. For example, price controls on grain in ancient Egypt were justified to prevent reoccurring famines⁴, while in 18th century France price controls on grain were justified to enforce a “reasonable price” for bread in the face of rampant inflation⁵ (continually justified, I’m sure, until its official removal 200 years later in 1976).
Justifications for controls on the price of labor in early 20th century United States were diametrically opposite those proposed by politicians in the late-early 20th-21st century. For example, in the 1930’s proponents of an act to enforce local minimum wages for federal contracts justified it as a way to stop lower wage labor from the south from competing with high-wage union labor in the north.⁶ Today, however, the same style of price controls are justified as an attempt to increase the bargaining power of workers, create jobs, promote “equality”, and give workers a “living wage”.⁷
Regardless of the justifications or the proposed social ills at the time, the logic of the market process works all the same. Using the logic from above, if a coercive institution successfully enforces a price above (or below) the range of prices that all the parties find mutually accommodating, then the value the seller (or buyer) must lose will exceed the value gained through exchange, meaning the exchange will not take place. Unlike the previous situation I described, without the systemic pressure to lower (or raise) the price, this outcome will persist overtime and is the surest way to guarantee demand goes unmet.⁸
Housing in Particular
Second only to interest rate manipulation, price controls on housing are likely the most insidious and devastating of the price controls. But much like the examples above, the justifications for rent control (and land-use restrictions in general) have ranged enormously, from a need to overturn conspiring landlords or developers, to prevent the rich from “buying all the housing”, to protect tenants from inflation or “gentrification”, or to make rents “affordable” because they’re considered “too high”.
As already stated, prices are not volitional, they are a reflection of the terms necessary for both parties to value an exchange. If rents are set below the market rate, as is desired by rent control policy, many individual landowners will no longer find the time and effort associated with renting properties valuable. As a response, landowners who can will begin withdrawing their properties from the market. Manifestations of this include small-operators withdrawing rooms in their homes or spare condominiums from the market. For example, after eight years of rent control in DC during the 1970’s, rental housing stock declined absolutely by about 24,000 units⁹ and Berkeley, California saw a decrease in private housing units available to students fall by 31 percent in five years¹⁰. In Toronto, Canada owner-occupied apartment buildings withdrew 23 percent of their units within three-years.¹¹
All of the changes summarized above happened too quickly to be associated with natural housing deterioration, but as the effects of rent control wear on, maintenance does become a serious problem. If property managers cannot receive enough value from tenants to justify maintaining the property, deterioration accelerates. At the height of New York City’s rent control experiment in the 1970’s, upwards of 30,000 dwelling units annually were condemned and destroyed.¹²
The gruesomeness of the market process under price controls does not end there. For the same reasons property managers allow units to fall into decay, prospective builders either build units not covered under rent control restrictions, such as luxury housing, or don’t build replacement apartment buildings at all. For nine years after World War II in Melbourne, Australia not a single new apartment building had been constructed¹³ and after rent control was introduced in Santa Monica California in 1979, building permits for new construction fell by 90 percent in five years.¹⁴
As aptly stated by one prominent economist and self-described socialist, “in many cases rent control appears to be the most efficient technique presently known to destroy a city — except for bombing.”¹⁵
[1] It is not that you can’t come up with ad-hoc explanations, it is hard to come up with a competing universal explanation.
[2] Despite all the spilled ink on matters of equilibrium, “market failures”, and formalized decision making, the principles of market process are still the most significant and well understood discoveries in the field of economics.
[3] Thomas Sowell, Knowledge and Decisions, p.99
[4] Butler & Schettinger, Forty Centuries of Wage and Price Controls, p. 9
[5] Butler & Schettinger, Forty Centuries of Wage and Price Controls, p. 45
[6] Walter Williams, Youth and Minority Unemployment, p. 24
[7] What I find interesting (and disturbing) is the dichotomy. Proponents in the past were simultaneously blatantly racist and well aware of the economic effects of minimum wage policy. Contrast that with proponents today who simultaneously claim equality and prove completely ignorant of the effects of their policy proposals. Both apparently lead you to the same result.
[8] Economics is a set of statistical laws, not point estimates. How exactly each price control will play out in the market is unpredictable, but has been documented in seemingly endless articles on the subject of food, labor, and housing.
[9] Thomas Sowell, Basic Economics, p. 43, source link.
[10] Thomas Sowell, Basic Economics, p. 43, source link.
[11] Thomas Sowell, Basic Economics, p. 44, source link.
[12] Butler & Schettinger, Forty Centuries of Wage and Price Controls, p. 80
[13] Thomas Sowell, Basic Economics, p. 41, source link.
[14] Thomas Sowell, Basic Economics, p. 41, source link.
[15] EconLib
