Only bombing would be worse than rent control

The political battle over the welfare bill has led some people to propose rent controls as a solution to rising rents in Britain’s cities (especially London). Rent control, though, is probably the most unambiguously awful policy ever to be tried in modern western democracy. In theory and practice it is a disaster, choking off the supply of new rentable homes and grinding the quality of existing rented accommodation.

The theory is simple enough. Putting a price ceiling on any product below the market rate causes shortages: demand outstrips supply. Walter Block has a typically superb article in the Library of Economics and Liberty’s Online Encyclopedia of Economics on this:

One effect of government oversight is to retard investment in residential rental units. Imagine that you have five million dollars to invest and can place the funds in any industry you wish. In most businesses, governments will place only limited controls and taxes on your enterprise. But if you entrust your money to rental housing, you must pass one additional hurdle: the rent-control authority, with its hearings, red tape, and rent ceilings. Under these conditions is it any wonder that you are less likely to build or purchase rental housing?

This line of reasoning holds not just for you, but for everyone else as well. As a result, the quantity of apartments for rent will be far smaller than otherwise. And not so amazingly, the preceding analysis holds true not only for the case where rent controls are in place, but even where they are only threatened. The mere anticipation of controls is enough to have a chilling effect on such investment.

Block points out that the very whisper of rent controls can be harmful – if there’s a danger that your investment might be subject to punative state-imposed price ceilings, it’s probably better to play it safe and build something else.

Not only does rent control stop new construction, but by putting a stranglehold on supply it destroys neighbourhoods. Real-life experience with rent control has been predictably awful, with entire neighbourhoods in New York City becoming decayed and abandoned. Because demand outstrips supply, there is little incentive for landlords to keep their properties in a decent state, especially in poor parts of town:

Paul Niebanck found that 29 percent of rent-controlled housing in the United States was deteriorated, but only 8 percent of the uncontrolled units were in such a state of disrepair. Joel Brenner and Herbert Franklin cited similar statistics for England and France.

Block quotes Gunner Myrdal, an architect of Sweden’s welfare state who was given the Nobel Prize in economics as the left-wing balance to his co-winner FA Hayek:

Myrdal stated, “Rent control has in certain Western countries constituted, maybe, the worst example of poor planning by governments lacking courage and vision.”3 His fellow Swedish economist (and socialist) Assar Lindbeck asserted, “In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.”

Rent control would be worse than the status quo, but there are some things the government could do to make things better. Capping (or abolishing) housing benefit would reduce some of the upward pressure on demand, but the best thing would be to allow the supply of new places to live to grow. Britain’s planning laws are choking the construction of new homes, particularly low-rent ones. Why? As Mark Pennington has pointed out, planning laws give undue power to articulate middle classes, who can use it to block “undesirable” low-income housing developments in their areas. Reforming this system, so that it’s easier to build new homes of any type, would be a good step.

The grinding, anti-poor, primitive socialism that is rent control would be a catastrophe for the urban poor. Everybody should recognize this. No less than the Foreign Minister of the Socialist Republic of Vietnam spoke about rent controls in 1989:

Mr. Thach admitted that controls ... had artificially encouraged demand and discouraged supply.... House rents had ... been kept low ... so all the houses in Hanoi had fallen into disrepair, said Mr. Thach.

"The Americans couldn’t destroy Hanoi, but we have destroyed our city by very low rents. We realized it was stupid and that we must change policy."

Reassessing Hayek

I've just started the final draft of a new primer on the great 'Austrian School' (and Nobel) economist and political thinker F.A. Hayek. Perhaps more than anyone, Hayek kept alive the flame of liberty at a time, after the Second World War, where freedom had few friends. Communism had seized Eastern Europe, and in Western Europe, intellectuals were smitten by the appeal of state planning and confident in their abilities to 'win the peace' through greater government planning, spending and controls.

I wrote an earlier introduction to Hayek (download), published in 1983, which I am glad to say won many plaudits. Many people tell me it was their first introduction to the ideas of this seminal thinker. To some, indeed, it was their first exposure to the case for free markets and the free society, and to the explanation of why communism proved impossible to sustain in the long term.

But in recent years I have begun to see shortcomings in the earlier book. Hayek was still alive and active at the time, and I continued to meet him, either at meetings of the Mont Pelerin Society (the international association of liberal – in the European sense – academics, commentators, businesspeople and others). So it was hard to be objective. As time has passed, it is possible to put Hayek more into his historical context – remember, in 1983 the Iron Curtain had not fallen, and many people were still dismissing Hayek's predictions that communism would fail big-time. And as his ideas have spread, there has also been more criticism of them, some of it quite useful, which must be taken into account.

I like to think the earlier book was accessible, thanks partly to my colleague Madsen Pirie's injunction that none of the words I used should be more than an inch long. Not easy with Hayek or any of the Austrians, but with the exception of one mention of 'spontaneous' I managed it. But as I re-read it, I still think the book may seem a little too technical, in some places a little too detailed, and overall a little too long, for lay readers such as school and college students who may be interested in the principles of social organisation but who have no background in economics or political science. So this one, I hope will be a genuine primer. It should be out in the summer, so you will be able to tell me if I succeeded.

Don't ban adverts for boob jobs

In the wake of the fuss about some people being fitted with dodgy breast implants, the British Association of Aesthetic Plastic Surgeons (BAAPS) wants advertisements for cosmetic surgery to be banned and 'cowboy' plastic surgeons regulated out of existence.

It's a bad idea. For a start, the faulty implants, made by the French company Poly Implant Prostheses (PIP), were approved by the UK authorities when they were fitted, and many of them were fitted by NHS surgeons. It's not a 'cowboy' problem. And sadly, the call to ban 'cowboys' through regulation is the first resort of any interest group that feels its business threatened by competition. As Adam Smith knew 250 years ago, such appeals should be listened to "not only with the most scrupulous, but with the most suspicious attention".

Banning advertisements (for any good or service), meanwhile, robs the public of information. And people need information in order to make informed judgements about what they should choose. Many of us have spent hours on the internet, checking out the various features, quality and ratings of household appliances or cars or wristwatches. Shouldn't people be able to check out their surgeons? Advertisements convey useful information on just such decisions. Sure, you need to apply a bit of 'suspicious attention' to them: but in the UK at least, advertisements are required by law to be truthful.

It is actually rather difficult to draw a line between 'advertising' and 'information', because one of the main functions of advertising is to inform people – to alert them to options that they might never otherwise have discovered. Not just goods and services that they might have been unaware of, but suppliers, options, quality and price information that they may not have known. The sort of information, in fact, that established 'insider' suppliers definitely do not want people to know because it represents a threat to their cosy monopoly. And monopoly is never in the public interest. As Milton Friedman showed long ago, professionals' restrictions lead to higher prices and worse service.

Intellectuals and professional people invariably condemn advertising as crass and distasteful, with things like their 'limited time only' offers. Some surgeons have even expressed worry about 'buy one, get one free' offers with breast implants (which makes me wonder how many women would want a single, unless they had suffered mastectomy or some disfigurement). But such offers simply demonstrate that some suppliers have found ways to use up spare capacity in slack periods, or found ways to provide their service at half the cost of the establishment providers.

And is the 'advice' of the professionals, with their interest in keeping the business to themselves, any better or more reliable than the claims of advertisers, with their interest in breaking in to the market, and bound by the 'truth' condition as they are? Far fewer of us these days follow the advice of professionals without at least asking around, or checking things out on the web. And people do not make decisions on the strength of an advertisement alone. The advertisement alerts them to the options, then they root out the information they need.

So we should not ban breast-implant advertisements on the basis of what the establishment professionals of the British Association of Aesthetic Plastic Surgeons happen to think, any more than we should ban all those ads of cars racing round alpine bends on the grounds that the wise folk at the Society of Motor Manufacturers and Traders probably know what's best for us. We should let people discover all the options, and make up their own minds.

Subscribing to the ASI blog

Since moving to our new site, some of you have noticed that your RSS feed subscription has stopped working. I've tried to fix the old one, but to no avail, so readers will need to subscribe to a new, fully-functional RSS feed we've set up.

If you're used to reading the website in a feed reader like Google Reader, Bloglines, Netvibes or something else you'll need to resubscribe to our new feed address: http://feeds.feedburner.com/adamsmithinstitute.

(To those who have no idea what a feed reader is but are curious, I recommend trying out Google Reader - it compiles the text from all of your favourite blogs into a readable, constantly-updated text list of their postings, so you don't have to visit each site individually. It's a great way to stay on top of a lot of blogs.) 

If you're used to getting our blogs by email and haven't been getting them in the last few weeks, you'll need to resubscribe as well. You can do this in the box in the right column: simply add your email to that to get the latest posts from the ASI blog as they're published.

I'm sorry for the hassle of resubscribing. Thanks for bearing with us as we iron out kinks like this in the new site.

Fluffy capitalism

Last week, as has happened many times before, the Prime Minister gave a speech.

He began by telling us things we already know -- unemployment is up, confidence is down, Labour is to blame and the Tories are here to save the day -- and said to us, with all of the stern and confident authority of an Etonian schoolmaster, that "we won't build a better economy by turning our back on the free market. We'll do it by making sure that the market is fair as well as free." Adding for the sake of prudence that "of course there is a role for government, for regulation and intervention," he took great pains to explain that "the real solution is more enterprise, competition and innovation" -- platitudinal Occidental nothingspeak with which it is virtually impossible to disagree. In order to give effect to these sweet nothings he whispered in our collective national ear, the Prime Minister proposed that the UK adopt a kind of "Popular/Moral Capitalism", a system of economic organisation without any consistent philosophical grounding which, broadly speaking, holds that we should make "markets work for all of us, to spread wealth, freedom and opportunity." (As if they don't do that already.)

I should begin by thanking the Prime Minister: mere seconds of exposure to his outrageous oeuvre of political tripe instantaneously shattered the writer's block from which I've suffered since Christmas. Eamonn beat me to the punch by publishing the post that I wanted to write. As we have come to expect from Eamonn, his reply was both succinct and persuasive; "Capitalism," he wrote, "is perfectly moral and responsible, if only politicians let it be." I would have a difficult time stating the libertarian position any better. However, I fear that Eamonn -- by discussing economics at all -- conferred upon the day's political dialogue a degree of coherence and dignity that it did not deserve. For, despite the media headlines and the earnest debate in which the two (three?) major parties have struggled to engage, what is perfectly clear is that none of them are talking about capitalism, at least not capitalism in a form that a libertarian would recognise.

Cameron's speech -- which I have, unfortunately, read in full -- revolved around three pillars. The first, "social responsibility," espoused a belief that "companies have obligations, too"; ignored was the fact that corporate salaries house, feed, clothe, and generally cater for all of the needs of the vast majority of British families, either directly in salary, or indirectly through redistributive taxation, better than almost anywhere on Earth. The second was "responsible capitalism," in short, that "everyone should share in the success of the market"; the Prime Minister failed, however, to mention that it was the market which provides all goods and services -- the X Factor, Hermes ties, cut-price Addidas trainers, toothbrushes, and CD recordings of Prokofiev's Fifth Piano Concerto -- to every living person in Britain today at a reasonable price. His third plank was the proper allocation of "risk and reward" -- which was not, as might be sensible, a critique of Beveridge's bankrupt post-war Welfare State which has, for decades, laid the cost of lassitude and sloth firmly at the feet of the taxpayer, but rather a crass and pedestrian snipe at bankers' bonuses and executive remuneration, backed neither by evidence nor anything resembling sound economic argument. And after all of this, the Prime Minister had the unmitigated gall to suggest that his non-philosophy was compatible with a world where the UK supports "the new, the innovative and the bold;" and that, when this country is "fizzing with business potential," the consolidation of "seventeen... out-dated pieces of legislation" into a single new Parliamentary Act regarding co-operative businesses was an acceptable panacea for the economic ills we face.

If this was, as billed by the Conservative Party, meant to be a major statement of economic policy, it failed, and utterly. The New Statesman called the speech "hollow", "desperately short on specifics", "abstract and often contradictory"; the Guardian, a "cop-out". Michael Deacon, writing for the Telegraph, was even more damning: "so familiar have these words and phrases become, and so elementary are the messages they’re employed to convey, that the speakers need hardly bother filling in the gaps between them to create whole sentences: they might as well just recite the buzzwords, one after another, for 20 minutes." Even the hapless Ed Miliband managed to get the proverbial jump on the Prime Minister when he proposed populist, but nonetheless practical and concrete, policy proposals for a "fairer" market, arguing for the abolition of bank charges and fare rises on trains, to name a few.

Indeed, on closer examination, nowhere in the Prime Minister's proposals was there to be found any idea to enhance "enterprise, competition and innovation" -- no reduction of the tax burden, no loosening of employment law to enable greater private-sector hiring, no paring back of the Welfare State (which is, in effect, a subsidy for labour for which everyone pays) -- in other words, nothing which would actually improve the British economy or the lot of the British population. Furthermore, his proposals for the improvement of the market were not proposals, but rather, descriptions of the market's essential characteristics; markets necessarily reward their participants as they, per Hayek, teach consumers "who will serve us well: which grocer or travel agency, which department store or hotel, which doctor or solicitor," which shop floor assistant, which tube driver, which banker -- and teach suppliers how "to provide the most satisfactory solution for whatever particular personal problem we have to face." There is no room for morality here: either a man provides a service well, or he does not, and in a free society, should he fail, it is fair and right that his client -- not some indeterminate and fluffy Big Society ethics -- be the ultimate arbiter of his success.

In short, the mainstream debate which we read about in last week's papers has nothing to do with morality and capitalism: what the Prime Minister proposes is not moral and is not capitalism. And it is incumbent upon us to remind him of that.

Markets don't fail

Led by the UK’s own prime minister, markets are under assault for causing all our current economic woes. Blaming “market failure”, David Cameron is trying to outbid Nick Clegg and Ed Miliband for policies to reform the market system.

But markets don’t “fail.” They respond rationally, quickly and often brutally to conditions as they find them. If they see a shortage of supply or an excess of demand, they’ll drive prices higher. Conversely, excess supply or falling demand drives prices lower. If you’re looking for villains, examine why supply is constricted or inflated or why demand is stifled or encouraged. But don’t blame the markets for responding accordingly.

For example, the onset of the financial crisis three or four years ago was largely due in the US and the UK to excessive demand for mortgages from people who couldn’t afford them. In the US, this was driven by government mandates to Fannie Mae and Freddie Mac to do just that – pump up demand for housing. In the UK, tight restrictions on construction limited supply to a market that quite rationally came to believe home ownership was a sound substitute for more productive investment.

In both cases, the bankers’ cost of funding was distorted by deliberately low official interest-rate policies, the implicit knowledge they wouldn’t be allowed to fail and lax competition enforcement that led to the likes of Royal Bank of Scotland swallowing up competitors. The  logical response by the markets was to divert money to housing, just as the politicians wanted. As soon as this folly became apparent, the banks bailed out as did the humble folk queued outside branches of Northern Rock, much to the dismay of policymakers.

In the current sovereign debt crisis, the financial system was actively steered into purchasing more government debt than they otherwise would have by distorting regulations. Big banks are given privileged and lucrative roles as primary dealers in the initial distribution of new bond issues as long as they buy consistent amounts. Pension schemes are often required to hold a sizeable chunk of “safe” government bonds while minimum capital ratios for banks specifically require such bond holdings.

This reliably inflated demand facilitated and encouraged ever increasing issuance of government bonds. Lo and behold what happened when the markets said enough is enough. They had been responding rationally to conditions as they found them and were quickest off the mark to realise the game was up. They didn’t “fail” - they just didn’t deliver what the policymakers had wanted.

In the greater scheme of things, the past week’s agonising about executive pay and bank bonuses is pretty minor except for the fact it’s generating yet more silly ideas. Everybody now wants to encourage “co-operative” groups to create a “John Lewis economy” whereby employees are also big shareholders. Talk about putting all your eggs in one basket. Not only does your income depend on the success of your employer but so do your investments and your pension. Isn’t that what the Robert Maxwell fiasco was all about? Just ask any former Lehman Brothers employee how it feels to have all your compensation from salary to bonus to pension dependent on your employer.

John Lewis, for now, appears to be a well-run company and God bless them. But imagine the unintended consequences if all companies, good and bad, were steered into a similar structure and some go bust as they will and should – more bailouts, more regulation, less mobility, less creativity. If the John Lewis model is so obviously successful, it would be more widespread naturally – there’s nothing to prevent workers or unions from buying into their publicly-listed employers’ shares. They don’t need government instructions to make them do so.

Economics is fun

Madsen starts a new ASI series today.  For a few weeks we'll be posting a short video of 2-3 minutes very week on the ASI's YouTube channel.  The theme of the series is that "economics is fun", and in each of the videos Madsen will be covering a different point about economics.  Far from looking and sounding like worthy but rather dull lessons, the videos are designed to be quite lively and entertaining.  Short and sweet are the bywords.  The series marks the release of Madsen's new book, "Economics Made Simple".

Happy Chinese New Year!

A happy Chinese New Year to all our readers, and especially to all the Chinese ones!  Today starts the Year of the Dragon, which bodes really well.  Dragons in Western myth are fierce creatures to be slain by knights and saints, but in China they are symbols of great power and bring good fortune.

Those born in a dragon year are reckoned to be full of energy and bubbling with creativity.

"The Dragon is the mightiest of the signs. Dragons symbolize such character traits as dominance and ambition. Dragons prefer to live by their own rules and if left on their own, are usually successful. They’re driven, unafraid of challenges, and willing to take risks. They’re passionate in all they do and they do things in grand fashion."

Dragons also tend to be natural leaders, and are self-sufficient.  They do, however, have quick tempers.  Since we have two of them in the ASI, Madsen and Sam, it can get rather messy in the office when they scrap and breathe fire over everything.

Seriously, though, the omens are good for those of an optimistic bent.  The year of the Dragon is reckoned to be the year for great deeds, innovative ideas and big projects.  At New Year we can put the past behind us and look to the future and the new projects that it brings and the new successes that it promises.  A Happy New Year!

On getting very annoyed indeed about this living wage thing

Zoe Williams had a stab at trying to understand the living wage idea this past week.

What nobody in any of these corners would ever advocate is state spending as an alternative to fair wage settlements. The left would say: set a minimum living wage, make it decent, enforce it, unionise. The right would say: let the market determine wages; if people aren't paid enough, they'll stop spending and the supermarkets themselves will realise that boosting pay packets in the middle will yield better profits than one huge pay packet at the top.

Sadly, she failed to grasp what the economically literate would say about the problem of low pay in the UK. Which is, as I've mentioned here before, the following:

The difference between what we are told is a living wage and the current minimum wage is almost entirely the amount of tax and national insurance that must be paid (quite despicably) on such low wages. It isn't that wages are too low for the low paid: it is that taxes upon the low paid are too high.

If you want the poorly paid to have more money in their pockets then stop bloody taxing them so much, draining money from their pockets.

This really isn't rocket science you know. The income tax and National Insurance qualifying incomes should be up and around the £12,000 a year level (something we have been arguing here for years). There's a certain political sense in linking the minimum wage and that tax free allowance. For, of course, if the State says that it's immoral for you to earn less than that then why does the State get to stick its hand in your pocket and steal some of that?

And yes, it is still true. If those working full time full year on the minimum wage were not paying income tax and national insurance then they would indeed have incomes within spitting distance of that so called "living wage". And once all those campaigning for that minimum wage note this fact then I'll start to take notice of anything else they might have to say: but not until then.

Why not a "John Lewis" education sector, Mr Clegg?

According to the Deputy Prime Minister, employee-owned companies such as John Lewis tend to perform better than other companies.  This is hardly news, as the majority of successful companies around the world have been using employee share ownership schemes for decades to help attract, incentivise and retain key staff. However, Clegg's desire to promote and encourage more companies to follow their lead, raises an intriguing question - if employee-owned companies tend to perform better, why not employee-owned schools?  Why not extend the idea of 'responsible capitalism' into education?  As teachers play such an important role in children's schooling, then any incentives which can encourage teachers to perform better, clearly have enormous potential to do good.

This idea is not as far-fetched as some may think.  For example, in 2000 Richard Vedder (Distinguished Professor of Economics at Ohio University), published a short publication titled "Can Teachers Own Their Own Schools?", in which he presents a bold plan to allow teachers to become the owners of schools, thereby acquiring an attractive financial stake in the  education process.  His proposal draws inspiration from Margaret Thatcher's privatization of government council housing, privatization reforms in Latin America, and the E.S.O.P. (Employee Stock Ownership Plan) movement in the United States and he concludes that if teachers could become shareholders in different chains of for-profit schools then this would help to foster "vibrant school communities with increased parental involvement and the innovation and efficiency essential to produce educational excellence".

Unfortunately in the UK the Deputy Primate Minister still wants to discriminate against, discourage and restrict all for-profit companies from investing in education, which means that the sector as a whole will be denied the benefits of having employee owned schools.   It is also important to note that this is only one of numerous different benefits which for-profit companies could bring to the education table, if only politicians such as Nick Clegg would give them a fair and equal chance.  Nick Clegg's on-going approach to education does not represent 'responsible capitalism', but deeply 'irresponsible government'.