28 September 2017

Rent controls just don’t work. Here’s why


As Einstein didn’t tell us, insanity is doing the same thing over and over again and expecting a different result. Judging by his speech to the Labour Party conference yesterday, in which he announced his support for rent controls, Jeremy Corbyn is ignoring that advice.

We have tried rent controls before. In fact, they were in place for much of the 20th century. The result was a scarcity of dwellings that people could rent. A Parliamentary report published this April reported that the private rental market fell from 90 per cent of the housing stock to 10 per cent as a result. When we lifted rent controls, homes that people could rent returned. This could be a clue.

For, as Assar Lindbeck (who is both Swedish and a socialist) has pointed out, “next to bombing, rent control seems in many cases to be the most efficient technique so far known for destroying cities.” Which is why, when asked, 93 per cent of economists insist that a ceiling on rents reduces the quantity and quality of housing available. That two-decade wait for a flat in Stockholm could be a clue. But, of course, the more economists agree on a point, the more folk and political economics seems determined to ignore them.

The underlying logic is impeccable. Those supply and demand graphs at the beginning of your Economics for Dummies textbook are not optional extras; they are descriptions of our universe. Artificially reduce the price of something and demand will rise, supply will fall, and there will be shortages. Nicolas Maduro insisted that food be nice and cheap and Venezuela has no food. Another clue.

The market clearing price of something is the market clearing price. If you wish to reduce that price then you must either choke off demand or increase supply. Which is why all those economists keep insisting that if you wish to lower rents then work out some way to build more things that can be rented (insisting that we just have fewer people is not considered socially acceptable these days).

Some will argue that the government should build lots more houses. I would argue that we just blow up the Town and Country Planning Act 1947 and successors – for the 1930s was the last time that the private sector built the 300,000 dwellings a year that we are said to need to solve the housing crisis. But we are at least all working with the grain of this universe, this real world, in insisting that greater supply is what will lower prices.

Corbyn’s proposed rent controls, by contrast, would reduce investment in housing by limiting the returns from investing in housing. But the proposals are about more than the housing crisis. They go to the heart of the Labour leader’s misguided economic thinking.

At this point I am shocked to find myself agreeing with Theresa May. The odd blend of markets and capitalism is indeed the greatest agent of collective human progress ever created – or, as I would put it, not created but allowed to emerge from voluntary cooperation among free people.

Indeed, that free market and capitalist blend again is the only socio-economic system that has ever managed to raise the living standards of us ordinary folk.

We can show this too through the work of Angus Maddison whose life task was to measure living standards across time and geography. Two excellent pieces by Brad Delong demonstrate the same thing. Delong’s underlying point being that there is one great economic fact that we’ve got to explain. Any theory that doesn’t attempt to do so isn’t worth bothering with. The Great Fact is that in around 1750 in Britain, for the first time anywhere, the average oik like you and me experienced sustained, significant and substantial rises in living standards.

Places which then adopted that roughly capitalist and market-based socio-economic system, as even Karl Marx agreed, experienced those rises in living standards. Places which do not are still mired in that millennial poverty Maddison recorded. The extension of the system in recent decades has led to the greatest reduction of absolute poverty in the history of our species. A few more clues.

We’ve even tested all of this in the globe’s largest economic experiment ever: the 20th century. During the last century we had a number of roughly capitalist and market economies ranged against non-capitalist (for, of course, no one will now admit they might have been socialist) and non-market economies. As Paul Krugman has pointed out the latter didn’t manage the growth in economic efficiency which leads to soaring living standards. Bob Solow, another Nobel Laureate, has demonstrated that increase in efficiency produced 80 per cent of those rising standards. And, as even the only Soviet Laureate in economics, Leonid Kantorovich, conceded, even if you are going to plan you’ve still got to start with market prices. As a result, of course, all those non-market economies had appalling shortages of housing – and everything else – for their entire lifespans. Another clue.

Gather together these clues and the result is undeniable: there is no alternative. We have variants of capitalism and markets that work to be sure. Hong Kong’s laissez faire works, Sweden’s social democracy too – absent that flat shortage. We can select from within that spectrum according to taste, morals, fashion, or anything else that enters our pretty little heads. But non-capitalist, and much more importantly non-market, socio-economic systems do not raise the living standards of the people.

We’ve already done the experiments, tested the propositions and we have the evidence. All we need now is a method of providing Jezza with a clue.

Tim Worstall is senior fellow at the Adam Smith Institute