In this class-themed issue I want to touch on an important social distinction in the UK: the one between property owners and renters. It isn’t easy being a renter these days. According to the London Evening Standard, anyone renting in London will see about 85 per cent of their income swallowed up by rent. This is beyond uncomfortable. Why is rent so high? And is there anything that can be done about it? As I’m sure you’re aware, these two questions are closely linked: you can’t fix a problem unless you identify its cause. And here there be monsters.
Now, I fully expect the incoming Labour administration to implement some form of rent control. There are two reasons for this. First, it would be very popular, always a strong incentive for the politician. Secondly, it seems like an obviously good solution to the rental crisis. It isn’t. Rent controls always make housing crises worse. To explain why, I need to go on a little detour.
The nineteenth-century sociologist, Auguste Comte, neatly identified a central characteristic of primitive, pre-scientific thought. Specifically, explanation using what could be called the hidden hand. According to this mode of thought, there is agency behind everything that happens: everything happens because some person, or some supernatural being, wills it.
For the ancient Greeks, the wind blew at the caprice of Aeolus, god of the winds. Similarly, if the crops failed, it was because of Demeter, the goddess of harvest and agriculture, and if there was an earthquake, it was because Poseidon was angry.
A natural corollary of the hidden hand approach is blame. In the face of adversity, the pre-scientific mind looks for people, or some group, to blame. Someone must have angered the gods, and to appease them we have to find people to punish. Now, if the aim of the punishment is simply to inflict suffering on people we don’t like, then it’s going to be an effective policy. But will punishing them protect us from hurricanes, failed crops or earthquakes? Of course it won’t.
There are only two ways to bring rent down: increase supply or reduce demand
Modern science was only able to emerge after hidden hand explanations were precluded. Science requires the acceptance that there are two types of event: those which occur because some living being wanted them to and those which occur without anyone, or anything, choosing that they do. No one chooses a volcanic eruption, a landslide, or a tsunami, yet they occur nonetheless.
We can now approach one of the most pervasive misunderstandings about economics. It’s a misunderstanding embedded even in two of the most well-known definitions of the subject. First, Alfred Marshall’s “Economics is the study of the behaviour of man in the ordinary course of life.” Secondly, Lord Robbins’ “Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.” Both these definitions are dangerously misleading. By emphasising behaviour, they miss the most important aspect. What is it? That no one chooses what happens in the economy.
Although the macro-economy emerges as a result of a vast network of individual decisions, it is not chosen by any individual or any corporate body. In the brilliant phrase of the eighteenth-century thinker, Adam Ferguson, the economy is “…the result of human action, but not the execution of any human design.” We, as individuals, companies or governments, choose our actions in the circumstances we perceive. But the net consequences of this almost infinite number of decisions emerge without anyone actually choosing them.
Economics is, therefore, an extraordinarily complex hybrid that attempts to understand individual choices and to understand the results of the full set of individual choices.
Now, returning to our theme. There are certain prices that are deliberately chosen by powerful bodies or alliances. In these markets, policies that act to incentivise or disincentivise the price-setters can be effective. However, rent isn’t one of these prices. For sure, there are landlords who act without integrity, who rapaciously squeeze as much rent out of their poor tenants as they can. But these landlords would fall flat on their faces if there was a greater supply of rented accommodation.
They can only get away with it because of the shortage. It is true that rent controls punish landlords, and if punishment is the objective, then it’s a sensible policy. But as landlords leave the sector, or fail to maintain buildings which are no longer generating an income, the rental sector inevitably shrinks and the crisis worsens.
You might be surprised to learn that, according to the National House Building Council, record numbers of affordable and rentable homes were completed in 2023. This is good news. There are only two ways to bring rent down: increase the supply of rental accommodation, either by state-sponsored building or by providing tax incentives to the private sector. Or, by reducing the demand for rental accommodation. Rent controls achieve neither.
Peter Lawlor was the Chief Economist at the German Stock Exchange and continues to advise senior politicians and Wall St institutions. These are strictly his own views
