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Tuesday 1 February 2022

The Classical Economists’ Fantasy – BATAW, Build Any Thing Any Where

 If you have been trained in Economics (like me) and still cling to the conventional (neo-classical) version (I’ve learned better), then you would be one with the many voices proclaiming
“House prices soaring away?  That can only mean a shortage, so a huge new supply is needed.”
This is the ‘commonsense’ view of many politicians. Cut red tape, speed up the planning applications, kick the builders into building more, more, more! are the watchwords. But as Keynes sharply put it, they are no more than echoes of the ravings of the Defunct Economists (DE) – you know, they ones who didn’t see it (GFC2008) coming.
Yet some of these conventional economists are quite prepared to look reality in the face. In a very interesting paper by Bowman, Myers and Southwood in September 2021 on the obscure but interesting blog workinprogress. Their intriguing title The Housing Theory of Everything[1] has very broad ambitions. The housing problem isn’t just the withering of the great home-owning democracy and the injustice of staggeringly high prices faced by the youngsters. No, the broken housing market is responsible for lowering the birthrate, obesity, and bloating the carbon footprint of suburban dwellers. It’s a most entertaining read!
The authors graphically illustrate my point that it’s not the house builders’ fault. House prices may have tripled since 1970, but the builders have managed to keep build costs under control. It costs about the same today per square metre[2] to build as it did 20 or 50 years ago (all figures inflation adjusted obviously).  The authors give a telling example why this is not good enough, though. As customers we expect more progress, with cheaper better products becoming available. Take the automobile – today’s model is quarter the price, more reliable, comfortable and much better equipped. I loved my old 1970 Ford Cortina, but my 2020 Mazda SUV is a great comfort in my old age!
So build cost is not to blame for houses tripling in cost. I’ve tried to explain the mechanism for the staggering real rises in house prices. For these authors, neo-classical economist to a man, the explanation is quite simple:
The main cause of this is regulations that ban buildings that make better use of the land.” And
“This wedge, between build costs and house prices, is a rough proxy for how much extra cost is being driven by restrictions on new building.”  
This of course is even more defunct economics, but of course they have the mathematical models. Of course, based on their assumptions they can logically, algebraically prove that remove all ‘restrictions’, their weasel-word for the planning laws. The Building Regulations (regs) are rules to ensure the houses are strong and stable, healthy and heat-insulated, fire-resistant and escapable (as Grenfell Tower clearly wasn’t)(but as generally thought to be a result of the defunct-economists approval of the ‘bonfire of red tape’). They take the strong individualistic libertarian nay Ayn-Randian view that all these restraints on freedom result, in this case, in horribly expensive housing, badly designed and built and too few of them
It is commonplace for these economists, often imbued with the Economics of Public Choice Theory (you’ll have to look that one up) to assume ALL public action is corrupt, self-serving vested interests, based on faulty analysis. But behind this conclusion lies a deeper form of deception. It was Mason Gaffney[3] who identified the great failure of economics in the US in Victorian times. At the behest of hugely wealthy industrialist donors, leading economics departments elided Land as a factor of production into Capital. [See Ryan-Collins video on Youtube explain this fraud] One of the main reasons for doing this was to counter the ever-rising influence of Henry George and the Land Taxers.
So that explains the curious conclusions above. If the free-market price is above the cost of production it is ‘evil and mis-guided public regulation’ that must be causing it. Absent is any notion that the cost of Land, the other pre-eminently obvious factor of production has something to do with it!
That is not to say Planning Laws don’t push up the cost of housing, or rather reduce the exploitation opportunities for a given parcel of land. Mandating maximum numbers of houses per acre allowed to be built is one obvious rule which pushes up costs. But the same rule will have vastly different effects in different parts of the country, and in different parts of a city. Why would any Council or Government want to avoid cramming the maximum profitable number of houses onto an estate? Public amenity perhaps? Neighbours in a leafy spacious suburb would wish to maintain the character of the area. These may be crass motives, but if the public vote for them, isn’t that democracy?
In the final analysis we would say that the price of the plot of land incorporates both the regulatorily-imposed shortage of effective building plots plus the societally derived value of amenities like transport, good schools but above all the prosperity and earnings potential derived for the efforts of people working together in the local economy.   
But let us take Bowman, Myers and Southwood at their own analysis. The super-pricing of houses above their construction costs is due to interference in the free market by Planning Laws and Regulations. This leads to the obvious conclusion that the more regulations abandoned the more, through the normal workings of the market, will house prices come down to near their cost of production. The sentiment we totally agree with, but which regs. To go, and how much difference will it make?
One of the authors has been active in the YIMBY campaigns, both generally and in London. Their obvious name Yes-in-my-back-yard is a deliberate contrast to Nimby – Not-in-my-back-yard. It is a positive message and you cannot but admire their efforts. Showing examples of mansard additions to tall, but venerable London street housing is fine. It shows that in special circumstances cramming in more accommodation need not spoil the neighbourhood.
The authors also point to good practice abroad. “Japanese land use regulation is light touch. At its most restrictive, it allows buildings three floors high that use up the entirety of their parcel of land.” For other examples of liveable densely packed cities the authors point to central Paris and Barcelona, as what might eventuate from a bonfire of the regulations.
(Oh what a tasteless remark when the example of Grenfell Tower is fresh in the memory. Lax inspection or light-touch regulation meant that death-trap cladding was affixed to the outside. This high-rise tower block has been by far the preferred response to cramming more people into the urban environment. Maybe regulation is not such an unmitigated drag on the market after all)
So essentially what the authors claim is that allowing the maximum exploitation of every plot without any local control would ‘fix-it’. This is what you might call BATAW — Build Any Thing Any Where. As a philosophy is has appeal, especially to those who crave Freedom for everyone. This is pure economistic fantasy and it is impossible to imagine any regime, authoritarian or not implementing it. They may point to ancient city centres which we find so attractive as models to copy. The higgeldy-piggeldy layouts and tall houses on narrow streets are appealing true (but wasn’t it the fire risk of jette’ed floors which led to their banning after the Great Fire of London in 1666?
The authors make a very good case that “By historical and global standards, today’s most successful cities in America and other Western countries are astonishingly sparsely populated and sprawling.” They lay the blame for this, of course, on ‘the regulations’. But where do they find the consumer appetite for city cramming? Sure, public housing in the form of tower blocks is a disgrace, and many tenants can’t wait to get out. The private sector is very good at providing swanky, concierged apartment blocks. This may be good for the elderly and the footloose young. But overwhelmingly the demand is for stand-alone houses with your own front door and with a garden. Hence urban sprawl. We can visualise raising a family here, perhaps the most fundamental and virtuous instinct of them all.

[1] 14Sep2021
[2] Earlier I gave a figure for UK building cost of about £1,350 per sq m. Building costs in the US are about half that at about $90 per sq. ft. say $900 (£666) per sq m according to a heavyweight US reference,  The Economic Implications of Housing Supply’ Edward Glaeser, Joseph Gyourko  J. Econ Perspectives 32 1,wINTER 2018.
[3] Gaffney, M., Harrison, F., & Feder, K. The Corruption of Economics. (London: Shepheard-Walwyn (Publishers) Ltd., 1994)