PJ O'Rourke provides wisdom via Adam Smith (HT: Mark Kobey):
The free market is dead. It was killed by the Bolshevik Revolution,
fascist dirigisme, Keynesianism, the Great Depression, the second world
war economic controls, the Labour party victory of 1945, Keynesianism
again, the Arab oil embargo, Anthony Giddens’s “third way” and the
current financial crisis. The free market has died at least 10 times in
the past century. And whenever the market expires people want to know
what Adam Smith would say. It is a moment of, “Hello, God, how’s my
atheism going?”
Adam
Smith would be laughing too hard to say anything. Smith spotted the
precise cause of our economic calamity not just before it happened but
232 years before – probably a record for going short.
“A dwelling-house, as such, contributes nothing to the revenue of its inhabitant,” Smith said in The Wealth of Nations.
“If it is lett [sic] to a tenant for rent, as the house itself can
produce nothing, the tenant must always pay the rent out of some other
revenue.” Therefore Smith concluded that, although a house can make
money for its owner if it is rented, “the revenue of the whole body of
the people can never be in the smallest degree increased by it”. [281]*
Smith was familiar with rampant speculation, or “overtrading” as he politely called it.
The rest is equally astute. Read it.
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{ 14 comments }
Kinda scary when a humorist is one of the most lucid journalists following the economy.
Very good article, as usual. Sadly missing, however, is PJ's humor and Menckenian wit.
I disagree with Smith about housing. I can imagine several living arrangements under which I would be less productive than I am under my current arrangement, and several under which I would be more productive. Furthermore, quality housing adds to the value of my most important investment, my children. The statement "the revenue of the whole body of the people can never be in the smallest degree increased by it" is an example of Smith focusing squarely on the seen.
Kevin, could you elaborate on what various housing arrangements might make you more or less productive?
The simplest would be proximity to my place of employment. One might say that this is not a feature of housing, but to take Smith's statement literally, we could all live in a big high rise in Nebraska and not experience a drop in GDP.
Another is comfort. My home provides a venue in which I rest and recover and replenish my energies to bring to bear in whatever productive tasks I undertake. Too much comfort, and I may become complacent. Too little, and I may never be 100%.
Another is security. If the building itself is particularly vulnerable, I have to expend personal resources to secure the home, reducing my productivity.
Another is connectivity. A housing arrangement that affords me access to various social networks (the internet, for example), makes me and my children far more productive (insert slacking off joke here, if you like) than I would be otherwise.
Housing touches people's lives in a very intimate and comprehensive way. I'm surprised Smith took everything else for granted as he discounted the influence of a man's home on his life.
"I can imagine several living arrangements under which I would be less productive than I am under my current arrangement, and several under which I would be more productive. "
Kevin, that's beside the point. It's the same argument teachers and government employees make to claim that they, too, add to the economy. While it's true, that we need teachers, government employees and houses, none of them contributes directly to this year's wealth-creation. They're costs — just like houses.
Adam Smith was not talking about productivity or utility. If you read Smith's entire passage, you'll notice that he clearly recognizes that a house produces useful services for its dwellers.
What Smith said is in reality very simple: that residential rents represent payments for the consumption of services, and should never be confounded with payments for the use of production inputs.
As always, it's amazing how Smith had, at that time, such a sophisticated and clear view of economic matters.
I'm with Kevin. Housing certainly increases productivity; however, any increment of housing cost doesn't add a commensurate increment of productivity. I recently moved from a three bedroom house (one occupant) to a two bedroom flat much closer to my work, and I have plenty of space. In fact, with less house to keep, I have more time, so I could be more productive … in theory.
Like many goods, housing is both investment and consumption, and no bright line separates the one from the other.
And I'm not sure what difference renting vs. owning makes. Classical liberals weren't fond of rents generally, but renting a property is not necessarily less productive than owning one. Whether a "rent" is productive or not depends on the landlord.
Kevin, that's beside the point.
I don't know what point you think it's beside. I was commenting specifically on Smith's statement that housing cannot increase the whole revenue of the people in the slightest, and I was asked by Marcus to give examples of how housing has done so for me personally. My experience is that the configuration and quality of my housing resource has an effect on not only this year's revenue of the whole body of the people, but future years' revenues as well.
… residential rents represent payments for the consumption of services, and should never be confounded with payments for the use of production inputs.
I got that. He's wrong. I would be a more or less valuable resource under different living conditions. My payment for my home is in part consumption and in part an investment in myself and my children. You might systematically exclude housing for the difficulty Martin points out in drawing the line between consumption and investment, but the assertion that housing can do nothing to increase (or, by extension, decrease) productivity and production is just flat out incorrect.
No Kevin, Smith is mostly right and you're mostly wrong.
You're attacking Smith by suggesting that Smith is being scientifically parsimonious. This is a good thing, not a bad thing. Your argument cannot be used to invalidate Smith's assumptions. His assumptions are reasonable, yours are not.
You can stretch your argument that housing increases productivity as much as you want, and yet it will not make Smith's assumption worse than yours. Not even close to be worse than yours.
I'm sure that people rent houses for many different reasons, and "increased productivity" will be among the least important of them.
For example, according to your argument almost everything that a family consumes would end up being classified as a production input instead of consumption. Would you argue that paying for cable TV is a production input? Paying for clothing is a production input?
The line has to be drawn somewhere, and in the case of residential rents it seems evident to me that it's Smith that is drawing it right, not you.
it can often seem that the world has forgotten (or lost or is ignoring) more economics than it now knows.
Housing is mostly consumption. Sometimes it can be an investment, or partially so, but mostly not.
Going from no house at all to some house is more of an investment, for example. But going from one house to another slightly better house is not.
“A dwelling-house, as such, contributes nothing to the revenue of its inhabitant,”
You work for revenue to pay for housing.
You don't buy a house to generate revenue.
If you do, then to the extent it is generating revenue, it is not housing, it is a capital good.
I need some housing to generate revenue. If I were living under a bridge, I'd earn less under almost any conceivable circumstances. Precisely how much of my housing cost is consumption vs. investment is a fair question, but certainly some of it is investment.
Personally, I live in a two bedroom condo in a complex half-filled with college students. Most of my housing expense is investment, because I couldn't live much more cheaply and maintain my professional appearance … such as it is. I could easily spend twice as much on housing, but I'd rather not.
If I move up to a four bedroom house, for one person, with vaulted ceilings, double showers, large whirlpool baths, large kitchen with granite counters and all that jazz, then much more of my housing expense is consumption.
In some parts of the country, a true "housing bubble" apparently occurred, i.e. prices of all houses rose precipitously, but in my neck of the woods, the problem is more about a shift of new home construction in this upscale direction when the market really won't support it.