Tuesday, January 09, 2007

Markets Do Not Solve Housing 'Crises' - nor do regulations and interventions

See what a fine mess you get into when you invoke invisible hands as the solution to all problems:

Murtaza Baxamusa
in Voice of San Diego (‘an independent non-profit’) 9 January, at http://www.voiceofsandiego.org/, writes piece entitled: “Market Is Not Solving Housing Crisis”, in which he states:

The invisible prankster that Adam Smith conjured juggling the fortunes of nations seems to have dropped the affordability prop for San Diego's middle class. In 2006, I watched with some glee as home prices fell, hoping that our middle-class renters would have a better shot at homeownership. However, profit-seeking developers destroyed any inkling of hope for the middle-class by putting the brakes on construction. All of a sudden, the building permits dropped, the cranes became silent, and the median-price of a home clutched onto the half-million dollar mark.

Market fatalism is the idolized dependency on invisible conjurations to solve our real problems. Last year, even with record profits in the building industry, housing affordability fell by 8 percentage points (CPI Housing Brief). Our analysis of the latest Census data reveals that almost half the households in San Diego County lived in housing they couldn't afford in 2005. The so-called "naturally affordable" rates established by the market are out of reach for our middle-class, regardless of whether you own or rent.”

Markets (not ‘the Market’, as if there is only one such entity) do not ‘solve’ distribution problems. In fact, they do not ‘solve’ any problems. They are the outcome of the independent, uncoordinated decisions of people who compare their means with the ends they aspire to at particular moments. No sooner does one market operate and close (each sell-buy decision ‘closes’ its market) than another market opens and buyers and sellers attempt their transactions. Any individual market has a short ‘life’ span; some lasting seconds, most lasting longer.

I know nothing about the particular markets for housing in San Diego, but I know even less about the theory that any particular market at any moment on any particular day in any particular locality should be able, somehow (unexplained) result in a particular outcome for a particular group of buyers and sellers. I suspect there is some ambiguity as to the meaning of ‘naturally affordable’ prices; or somebody is confusing ‘natural’ with desirable and to the satisfaction of all individuals who are looking to buy.

Just as the ‘middle class’ potential buyers might be disappointed that they were unable to persuade any sellers to sell them a house at the price they considered affordable by them, given their incomes and the other expenses they consider essential to their happiness and comfort, so would sellers be disappointed by their inability to sell their houses at prices they could afford, given their costs and considering their other aspirations.

I know of no theory or practice of markets to meet the desires of both all buyers who with to buy anything and all sellers who wish to sell anything. Adam Smith distinguished between ‘effectual’ demand and general demand, the former backed by the buyers’ cash and the latter by aspirations but not cash; he also distinguished between ‘natural supply’ and ‘market supply’, the former the quantity saleable at prices that would return to the factors that when combined in a process, produced the product (in his case, owners of land, owners of labour and owners of capital) and the latter by market prices that reflected the amount demanded and the amount supplied (but which may or may not cover the producers’ costs and the effectual aspirations of the consumers).

Beyond that, nothing was ordained, or promised, or mandated. And nothing in human experience, over several millennia of it, has shown that markets, or for that matter any other arrangement of society, can bring the two sides of every transaction, in and out of markets, into perfect harmony so that there are no disappointed sellers and no disappointed buyers. The one sure thing is that markets, operating freely, will tend to produce outcomes that match the aspirations of the keenest buyers with the aspirations of the keenest sellers.

All attempts to manipulate economic arrangements to satisfy all otherwise disappointed buyers always affect the consequential behaviours of enough disappointed sellers to change supplies in future periods (by finding other things to do with their resources and time), and all attempts to manipulate economic arrangements to satisfy all otherwise disappointed sellers always affect the consequential behaviours of enough disappointed buyers to force them to do without and make other less satisfactory arrangements. In both cases, living standards fall.

I share the despair of Murtaza Baxamusa at “Market fatalism [that] is the idolized dependency on invisible conjurations to solve our real problems”, but I am obliged to point out that ‘market fatalism’ and its ‘dependency on invisible conjurations’ has nothing to do with Adam Smith’s ‘conjured juggling the fortunes of nations’. He conceived of no such thing. His metaphor of ‘an invisible hand’ was to do with human motivations, not markets. The source of ‘invisible conjurations’ lies in the inappropriate attribution of ‘an invisible hand’ to the theory of markets by 20th-century economists at Chicago University, and the assertions they drew from their attributions. The Adam Smith who lived in Kirkcaldy and Edinburgh died a stranger to such ideas.

Most of the population of 18th-century Scotland lived in ‘hovels’ commensurate with what they could afford out of what was ‘affordable’. So did the ‘middle-class’ and ‘above’. And when Edinburgh expanded in the 18th century into what is still known as the ‘New Town’, only the upper middle class could afford to move there (among whom was David Hume). Smith preferred to stay in his rented accommodation at Panmure House where he lived from 1778-1790 in the ‘Old’ Town, admittedly not in a hovel; those who moved made room for some of the population to re-distributed themselves into more suitable accommodation, using the facilities of local housing markets to match the aspirations of buyers to the aspirations of property owners and landlords.

It has ever been thus in housing markets. It was true in ancient Rome (population a million) and in Bethlehem (and no doubt in Medina too). It is true today and will be true tomorrow. Murtaza Baxamusa may like to enlighten his readers as to what exactly he proposes to do differently in San Diego that nobody has succeeded to do anywhere else; housing markets stratify buyers according to their ‘effectual demand’; regulated housing allocation makes some better off, for a while until standards fall; but for the majority, the problem remains.


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