One sentence popped out at me in your latest excerpt from the Times. It also reminds me that I should get back to the discussion of Classical Political Economy with Keith. The sentence was this:
"Housing prices, which soared in the expansion of the 1990's, have not gone down, even though the economy has tumbled."
Well, the price of a house has dropped - simply because it's older. A house needing roof repair, electrical wiring, plumbing replacements, and so on, is obviously worth less than a brand new house with everything working properly.
So, why aren't housing prices falling along with other prices?
Something Keith wasn't sure about was my remark that land wasn't part of the "price mechanism controlled" free market. Rather, it was part of the collectible market - a market completely different from the market we mostly talk about - the one that efficiently runs the economy.
When you buy an antique clock for $1,000 and "collect" it - that is stay with it as its price goes to $5,000, then $10,000 and perhaps on to $50,000 - if the economy sags and things get tough, you still don't sell it. It's your nest-egg - something to make the retirement a little more sweet.
Should the 'clock market' weaken and your clock drop to (say) $40,000, you still don't sell for in your mind, you have a $50,000 clock and you don't want to lose $10,000. In any event you feel sure the price will again march upward, so you hold on and will still expect regard it as a $50,000 clock.
(Somehow, you don't think in terms of your $10,000 clock now being worth $40,000.)
No income comes from your investment. In fact, you are not interested in income - sales price is everything.
Antique clocks don't matter to the economy, but land does for nothing happens in the economy without land. So, if land behaves like a collectible we have a problem. The reason why housing prices aren't falling is because the prices of land are not falling.
So, is a land price important? You might be surprised that the proportion of land price in the total housing price is between 50% and 70%.
A study was recently done in Australia and they found that across the continent, the land component of housing was 65%. In other words, all the labor, management, professional input, and suppliers of materials, get 35% of the price.
The other 65% of the price must be paid for the right to start work. The first "star" I met when I arrived in Los Angeles was Peter Falk - later to be Columbo. He had just won an Emmy for a great little drama called "The Price of Tomatoes".
If Falk didn't get his truckload of tomatoes into San Diego by 4 am - they wouldn't sell. He would have a truckload of rotting tomatoes. So, of course, he ran into a pregnant woman, who had to be taken to hospital - and so on. However, the point was made about the efficiency of the market. Goods move quickly to where they are needed under pressure of the price mechanism.
Except with collectibles, where demand doesn't force the item to the market place. Rather, the price rise that follows increased demand makes the collector even more eager to hang on.
In engineering terms, the free market is a negative feedback mechanism constantly bringing prices back to an equilibrium. (Like a thermostat that keeps your home at 70 degrees. If the temperature rises, the furnace cuts off - if the temperature drops, the furnace comes on.) The temperature doesn't remain at 70 degrees - it hunts around 70. In similar fashion, the market mechanism hunts around an equilibrium price.
The collectible market is the very opposite. It's a positive feedback response, constantly driving prices away from equilibrium.
In the price-mechanism controlled market, a higher price pulls in suppliers from everywhere. In a collectible market, collectors stay away when prices increase. From experience, they know that the last collector to sell gets the highest price.
(Think how lucky Hussein is that we won't let him sell his oil.)
A market where everyone is trying to be the last one to sell bears no resemblance to the free market. And in the case of land, it sends ever climbing prices to the developer, builder and home buyer.
So, when do prices stop climbing? One theory is that when land prices rise so high that houses cannot be built, factories cannot be erected, skyscrapers cannot be constructed, the economy crashes.
Every major depression has been preceded by a wild orgy of land speculation.
So, here's the thing. We have a free market in which the price of capital is controlled by a highly effective price mechanism. (That's real material Capital - not bits of paper floating around the system and messing things up.) The market makes sure you get the best quality Capital at the lowest possible price.
We have a free market in which the price of Labor is controlled by a highly effective price mechanism. The market makes sure you get the best quality Labor at the lowest possible price.
And we have a collectible market in Land, which ensures you get the lowest quality land at the highest possible price.
Now you know why the free market doesn't work to keep Wages high.
You also know why so many people lived in council houses in Britain - until Maggie sold them cheaply to tenants who otherwise couldn't afford a place of their own.
You know why in the US the phrase "unaffordable housing" has entered the language. I don't want to bore everyone with a list, but think within your experience how many laws, plans, projects are created, simply to handle the high cost of land.
When Ricardo, two centuries ago, first set out his "Iron Law of Wages" which explained why Wages are continually forced lower, I don't think he even knew the term "collectible".
Anyone who wishes to correct the system without moving further toward a police state should begin thinking about the reasons why things happen and less about the latest surefire solution.
Harry
"Solutions are easy. The difficulty lies in discovering the problem." -------------------------- Albert Einstein
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Harry Pollard
Henry George School of LA
Box 655
Tujunga CA 91042
Tel: (818) 352-4141
Fax: (818) 353-2242
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