Our free market society is based Adam Smith’s concept of the “invisible hand” that, when markets are allowed to operate freely, allocates resources in an optimal way.
Time and again this theory has proven itself correct, even when the outcome defies what most people believe to be “correct.”
In the 70’s, when oil prices skyrocketed, people demanded price controls. The result was mile long lines at the gas station, over consumption of gas, and the people paid for it anyway through their taxes.
I have always been a staunch capitalist, but lately I have had a hard time reconciling what the free market says with my own common sense.
Here is an article from today with the 5 highest rents in New York City. In this case, the free markets are telling us that our resources would be better used building $500k/month apartments than however many lives this money could save.
Also - more and more people are saying that most “blue collar” jobs will soon be better accomplished by machines. In this case, I suppose the free markets are telling us that those of us who do not have advanced degrees are destined to be unemployable.
Anyway - I would be interested to hear some thoughts on this question. Should we continue to trust Adam Smith’s invisible hand or our own common sense?
You failed to explain how the opposite of the free market in any resembles common sense.
For example, if the developer doesn’t build those $500k/mo lofts, then all those construction workers are out of jobs, all the janitors/doorpeople/receptionists/utility workers/accountants/salesmen/etc. are out of a job.
Your implicit “common sense” alternative is to build cheaper lofts, but without the expensive lofts to provide income to all the above-mentioned occupations, who will live in the cheaper lofts? Homeless vagrants?
In short: resources go the most productive allocation in a free market, which in turn provides the maximal productive capacity for a society.
First of all, there is a limited market for $500k/month apartments. Secondly, capitalism doesn’t tell you to love your children or your neighbor or donate money to help victims of hurricanes. Governments and charities do those things.
Actually, the invisible hand does quite mean that. Smith meant that the actions of thousands and millions of people, freely trading, tends to produce economic growth. But this doesn’t mean it was optimal. Optimal is pretty hard to measure, and it’s pretty hard to even define. It was never a question of measuring our actual progress against the ultimate possibility as measuring it against the alternative.
New York’s housing market is not exactly free. There are many restrictions which pull back the reins on new construction, plus the city is simply very jammed-in as it is. Goods (and services, and the people who use them) can’t move easily which tends to push city-dwellers towards the edges. While rent control is one element, there are also issues of rent stabilization, which works a bit differently, land-use restrictions, environmental regulation, and so forth.
Moreover, the reason rents of these luxury apartments are so high is that… (wait for it…) they’re luxuries. And happen to be located in tony neighborhoods with lots of amenities. And are conveniently locations. The top of the market in a major city with a shortage of buildable land and a large financial services industry is generally doomed to have some ridiculous high-end units. This is not, however, a particularly good reason to change our approach to free markets in general.
There is a fair amount of (relatively) low-cost housing in New York, but at the same time one major issue for cities is a shortage of middle-class space, and what is available tends to be aimed the upper-edge of the middle-class.
“Can’t move easily”? Hard to believe. I’ve ridden the NYC subways. It’s much faster and easier than driving in the 'burbs. It is safer. It is even more enjoyable, if your sensibilities are not too delicate.
Agree completely on your last paragraph. And I agree that New York real estate is not entirely a free market. But for the purposes of the question of luxury apartments, I’m not sure that really matters (a shortage of buildable land could just as easily occur within an entirely free market for other reasons).
In my view, the difference between that $500,000 apartment and a $10,000 one is purely a question of social status for the renter. Let’s say you were to ban luxury buildings entirely.
All of those construction workers would end up working on the next most profitable alternative - a normally priced apartment building? a school? office building? In any case, they would end up a little worse of financially than if they had been working on ultra luxury apartments. But the result of their work would be contributing a whole lot more value to society.
I have no problem with subways per se, but they only take you where the subway goes, and they’re basically useless at moving goods around. As you can imagine, this is quite a problem in dense urban cores. Also, quite a few people don’t like them. Depending on the city, subways are disgusting and/or dangerous.
In the case of New York specifically, the subways are nice but also limited. Many people absolutely require taxis (or services like Uber) just to get around. Increasingly, people must commune from considerable distances (which usually involves long trips and either jumping multiple lines or expensive parking).
New York commutes are substantially above the national average.
As I mentioned, none of the problems with building more housing are the result of free markets, per se. The market is simply doing the best it can within the constraints provided. If you want more housing of a certain stock, you need to find someone able to pay for it, and the current regulatory and physical environment does not provide many opportunities for folks to do that.
Some forms of price controls not only make sense, but are necessary.
For instance, if a hurricane is nearing, profiteers might jack up the price of plywood or bottled water by 500%, 1000%, or more. This is unfriendly, to say the least, and would be a symptom of totally unregulated capitalism. Putting a cap on that kind of profiteering keeps excessive greed from distorting the market. Vendors can still enjoy increased profits from increased sales, without generating artificial scarcity.
Once upon a time, people who couldn’t travel by foot went by horse. There were a lot of jobs related to horses: riding horses, raising horses, feeding and cleaning horses, shoveling manure, and so forth.
Then came new technology that could transport people and things cheaper, safer, and faster. People who raised horses or shoveled manure for a living were out of a job, or at least most of them were. Is that a bad thing?
Actually, trains and planes and automobiles are good things. They allow us to travel to places we couldn’t go on horseback. They make transportation cheaper, which lets us have more stuff. They allow entire industries to exist that didn’t exist in previous centuries. Even the people who formerly had jobs shoveling manure benefited from the change. Generally they got better jobs elsewhere, and enjoyed a higher standard of living as a result of new modes of transportation.
There are countless similar examples. Capitalism found a way to get oil by drilling into the ground; no one has a job harpooning whales for oil anymore. We get our news online; no one works as a town crier anymore. (Soon no one will work printing newspapers either.) We have light bulbs; no one works as a professional lamp-lighter any more. We cure disease with antibiotics; no one works collecting or applying leeches any more. And all of these things are good things, even for the people who lost their jobs to new technologies.
In the future, technology will continue to eliminate some, though not all, blue collar jobs. This will benefit everyone, even those who lose their jobs. You’re right in saying that it seems to violate common sense, but it’s true.
It also causes shortages. When the price goes up because of demand, supply increases faster than if the price is held artificially low. It doesn’t do you any good to have low priced plywood if there isn’t any of it in the stores to buy. If you want to optimize the supply, you’re better off subsidizing people’s emergency purchases or have the government step in and provide it for “free”. During natural disasters, normal supply lines might be compromised. Of course, when something is “free”, people tend to waste it.
However, if the price goes up 1000% (or whatever large amount) it promotes hoarding, and so there is also a cause of shortages. Instead of selling it all, a vendor would be rewarded by holding back some in a secret cache, waiting for the price to go even higher.
Agreed. In fact, this is one of the sensible reasons for doctors’ office co-pays. It provides a minimal disincentive to make use of the service. In the ideal, the co-pay is calibrated to dissuade trivial or wasteful office visits – like the kind of cut on the finger that an ordinary plastic bandage can treat.
Giving stuff away free also promotes hoarding. “Hey, look, I got a whole carton full of old vacuum tubes! Of course I don’t need 'em…but they were free!”
(I’m no dummy: I turn 'em into prop “steampunk” ray-guns and sell ‘em at conventions’ art shows!)
Hoarding is only a problem if supply is restricted. The best way to not restrict the supply is to allow the price to rise.
Anyway, I just want to point out that price controls generate shortages, so it’s not like all you need to do is slap on price control during natural disasters and everything is good.
Are these apartments constructed by private companies, or by the Ministry Of Buildings? If the former, you have imposed a crimp on their profit margin. As a result:
Some companies will fail (and their workers will be unemployed)
Other companies will withdraw from the market and expand in more profitable directions.
It then starts to get more expensive for anyone to build cheap apartments.
There are few goods or services that capitalism denies to rich people. And few that capitalism provides to poor people. In short, capitalism works MUCH better for the wealthy than it does for the poor. Always has, always will. But its days are numbered. As we move into a post-scarcity society, most governments are going to have to adopt socialism as a framework in order to remain stable.
You just get funnier and funnier. So, poor people don’t buy things? No TVs, no cell phones, no, I don’t know, food, clothing, gas, etc? Nothing? Or they only buy a ‘few goods and services that capitalism’ provides? They get everything else by magic or for ‘free’??
Laughable. Why are we entering a “post-scarcity” society if capitalism provides nothing to poor people? Shouldn’t we be in an extremely scarce society as a result of being capitalist?
Say what you will about capitalism, but one thing is certain: it produces more stuff than any other system. You need a better argument if you wish to promote socialism.
(For example, wealth disparity has no correction mechanism in a purely capitalist society. This is where socialism becomes necessary.)
If we truly have a post-scarcity society, then economics is solved and any economic system would work fine. But we’re never going to solve scarcity, because everything in life is limited, including time. Imagine a poor farmer around the early 1900s watching the rise of mechanized farming and predicting the end of scarcity, because in just a few years, there would be far more food than we could ever eat. If we manage to solve scarcity for consumer goods, society will just move on to more expensive stuff–in a few decades, people will be complaining that the poor can’t even afford personal spaceships or whatever.
The reason capitalism will fail is not that poor people don’t buy basic necessities and few trinkets besides. It’s because human labor is becoming increasingly unnecessary to produce these things. When capitalists have no need to hire and pay people to produce almost all goods and services, because software and robots can do it cheaper, guess what happens to your marketplace?
I suppose capitalism WOULD work if you were willing to embrace mass genocide starvation on the order of billions of people … I kind of hope that won’t happen.
“Can’t move easily”? Hard to believe. I’ve ridden the NYC subways. It’s much faster and easier than driving in the 'burbs. It is safer. It is even more enjoyable, if your sensibilities are not too delicate.
You just get funnier and funnier. So, poor people don’t buy things? No TVs, no cell phones, no, I don’t know, food, clothing, gas, etc? Nothing? Or they only buy a ‘few goods and services that capitalism’ provides? They get everything else by magic or for ‘free’??