Economic Nonsense: 31. The modern economy is so complex that only government can manage it

Actually, the opposite is true. The modern economy is so complex that even government cannot manage it. Who can manage it, then? The answer is no-one. No single authority or group of people can handle the volume of information, the speed of its responses and the complexity of its relationships.

This is not to say that the modern economy is out of control, but only to say that the self-regulating mechanisms within it can respond more rapidly and more surely than any body outside of it. A market economy is a self-regulating system. It responds to new information and signals people to change behaviour accordingly. Much as a thermostat detects temperature changes and adjusts the heat supply, so the market detects imbalances, shortages and surpluses and leads people to alter their behaviour in ways that redress them.

Some people wrongly suppose that if the economy is not centrally controlled in some way, then chaos will result. Not so. The order of the market arises spontaneously from the millions of interactions constantly taking place. It holds more information than any group of planners could hope to access, and it is faster to react to changes than any controlling authority could manage to achieve. It is also more intelligent, representing as it does the minds of the many rather than the limited brain power of a few people grouped around a table trying to direct it.

The economy directed by the actions of many allows different individuals to purse their separate goals, where the centrally directed economy is geared to achieving the aims of its planners instead. The market economy thus allows people to give effect to their own values and priorities, to be autonomous actors rather than the agents of someone else’s will. It allows for a society that is more free as well as more efficient.

Economic Nonsense: 29. The economy should be based on co-operation rather than competition

It is competition that makes the economy work. Producers compete with each other to supply consumers, and consumers bid against each other to decide who buys. When goods are in short supply consumers bid up prices, sending a signal to producers to produce more and thereby redress the shortage.

Competition allocates resources efficiently. The same steel that makes a bridge cannot also make a ship, and resources are allocated where they achieve most value and where they command the highest prices. Competition for workers drives up wages. It is competition throughout the economy that motivates people and sends the signals that tell people how to improve their circumstances.

If people attempted to base an economy on co-operation, it is difficult to see how they would know what to. Without the signals sent by competition in prices and resource allocation, they would not know what to produce, in what varieties and to what standard. The experiment with the socialist economies of the Soviet Union and its satellite states was an attempt to plan by co-operation instead of competition, and it failed miserably. State factories were inefficient and outdated and they produced shoddy goods. Shortages were a feature of everyday life.

State officials attempted to estimate needs and to instruct factories to produce goods accordingly. They had no knowledge of what people actually wanted. In a competitive economy, producers vie with each other to guess what the public will want, so that they can profit by producing it. In a co-operative economy they do not compete with each other, so some official or committee has to make the decision, with little at stake if they got it wrong, which they often did.

There is nothing wrong with competition. Misguided ideologues tried at one stage to eliminate it from schools, and some still do. In fact competition spurs people to improvement. It is usually friendly, with people looking to the achievements of others to see how they might improve their own lives. It is a fact of nature just as much as is the empathy we show towards others. Competition works, and it is a force that improves lives. In an economy it is essential.

Re-examining London’s misnamed green belt

The momentum is building up for a change in London’s housing policy after the election. The ASI published “The Green Noose” by Tom Papworth in January, showing that over a third of protected Green Belt land is devoted to intensive farming, by no means pretty to look at or environmentally friendly, and which in fact generates net environmental costs.

In February London First published “The Green Belt – A Place for Londoners?” giving the facts and figures on London’s land, and showing that only 26% of London’s Green Belt consists of environmentally protected land, parks, and public access land. They similarly showed that only 27.6% of London is covered by buildings, roads, paths and railways.

In today’s City AM Mark Boleat, policy chairman at the City of London Corporation, makes similar points, quoting the London First report, and pointing out that “a full 60% of the Green Belt is private agricultural land.”

The research done by bodies such as the Adam Smith Institute and London First contradicts the popular image of the Green Belt as green and pleasant land. Far from the daisy-strewn meadows and woods teeming with wildlife that the term suggests, much Green Belt land is farmland, with monoculture fields by no means friendly to wildlife or accessible to people.

The first step in re-evaluation might be to classify Green Belt land into the different types that comprise it. There is genuinely green land, the fields and woods that everyone likes. There is damaged or brownfield land, partly made up of abandoned buildings, gravel pits and the like. And there is farmland, much of which is not environmentally friendly.

The government that takes office after May’s election could take the initiative to redress a chronic shortage of housing where it is needed by allowing building to take place on land of types two and three, while leaving the genuinely green land preserved. The opposition will be much diminished if it is understood that only damaged, distressed or intensively farmed land will be affected. And more to the point, the extra houses will bring down the costs of housing and make it available to more people.

The housing question isn’t just how many, but where

I usually like Policy Exchange’s work but its new paper on solving the housing crisis is a little disappointing. Its main argument is that “Over one million new homes could be built over the next decade if each of the 353 councils in England built just one garden village of 3,000 new houses”. The arithmetic checks out, but that still wouldn’t do much to solve the housing crisis.

The problem with England’s housing market is not simply that not enough houses are being built. It’s that they’re being built in the wrong places. According to Paul Cheshire, twice as many homes were built in Doncaster and Barnsley (where there isn’t much demand for housing) as in Oxford and Cambridge (where there is) in the five years to 2013. In 2002/03, it was three times as many!

This is why national house construction numbers can often be misleading. The crisis of unaffordable houses is mostly centred on places like London, Oxford, Cambridge and the rest of the South East. People want to live where the jobs are. (As it happens, an older Policy Exchange paper recognised this, suggesting policies designed to make it easier for people to move from North to South.)

Spreading housing development around the country will hence end up doing much less than we might hope. If your problem is a housing shortage in London, building more in Hull won’t help much.

A second problem is that building entirely new villages is expensive, because of the new infrastructure that needs to be built. The report suggests paying for this with levies on the new builds, which just reduces the downward pressure on prices these houses would have. Building all that extra infrastructure is needless when there is already so much empty land around existing train stations to be built on in the South East (enough for one million homes!), where there really is demand for new housing.

I also wonder how much people want to live in villages which really would be very small. At the UK average household size of 2.4, we’re talking about villages of 7,200 people, far enough from existing towns that those residents won’t object to them. As someone who grew up outside an Irish town with a population of 6,666 (seriously), take it from me – these places can be a little dull.

There are 138 authorities in London and the home counties. Building new homes there – even if they had to be in new villages – would be better than nothing, although I don’t know how you’d go about building new villages in central London. Building new homes in places like Scunthorpe and rural Cornwall would be a lot less good, and policies that do not recognise that will distract us from what we really need to do.

Maybe there’s no such thing as a bad policy that results in more housing, but is it too much to ask that they also be houses that people want to live in, in places they want to live?

Another strange idea to reform the housing market

It does continue to amuse us, watching the contortions that people twist themselves into in their attempts to reform the housing market. As opposed to, you know, just getting on with issuing more planning permissions so as to bring down the price of housing. The latest one is that self-builders should be treated as special little snowflakes with their own, special snowflake, planning permissions system:

But we also need to reform the land market, to make it dramatically easier for those without much capital to buy a plot of land and commission their own homes – either individually or as a group. All political parties pledge theoretical support for custom and self-build, and the government’s “Right to Build”, which allows people to buy council land on which to build their own houses, is a first step. But systemic change is needed to create a market providing land specifically for custom and self-build housing.

Let’s create a new land use class in the planning system “C5 Custom build”. In effect, that would create a parallel land market that differentiates between a house built as a speculative asset, and a house built as a place to live. Let’s create space for both, and see which works.

There’s only one problem with this suggestion. Which is that we don’t in fact want a special class of planning permission for self builders. What we actually want is simply the issuance of more planning permits. For as is entirely obvious to everyone the price of housing in the UK is determined by a shortage of said planning permissions. So, therefore, we don’t want the creation of a special system for special snowflakes, we simply want the loosening of the planning permission system as a whole. And then indeed self builders can run alongside more commercially minded organisations and may the best man win.