Wednesday, September 16, 2009

Adam Smith on Chicago

Implicit in the "progressive" narrative is the belief that the public needs to be protected from hostile free markets by a benevolent state. We are told that without rent controls and subsidies "affordable housing" will be beyond the reach of most Chicagoans. The great economist Adam Smith, author of the Wealth of Nations, would have sharply disagreed with this. A brief analysis of recent changes in rents and taxes in Chicago will validate Mr. Smith's belief that competitive markets as usually more benign that coercive state intervention.

In the last year, rents have significantly fallen in Chicago. In some cases apartments that rented for $1,500 last year have fallen by 20% to $1,200. It's important to note that this "increase in affordable housing" occurred without a single government mandate or pressure from a community organization. Rather, acting independently via a free market, individual landlords responded to market signals that indicated a drop in demand by lowering the cost of their goods and services. Or, to put it simply, landlords lowered rents as a response to the declining capacity of consumers to pay high(er) rents via the current economic downturn.

On the other hand, Cook County has decided to raise property taxes, even as many families face grave economic difficulties, which will certainly increase the number of foreclosures.

We see here that the main differences between the state and competitive markets, is that providers of goods and services have to respond to the needs of the public or they will quickly go out of business. In this case, if a landlord chooses to not lower his rent to meet the capacity of consumers, they will surely choose a landlord or location with more affordable apartments. Or, they could choose a more affordable option like a smaller and / or less updated apartment or they could take advantage of the economy of scale by pairing up with roommates or additional family members and renting a larger apartment.

In contrast, most governments are far less responsive to the needs of the public. Cook County can get away with raising taxes beyond the capacity of its residents, because it is impervious to dynamic market signals that indicate the financial capacity of the public. And relative to free markets, governments face little competitive pressure that force them to lower costs and raise the quality of their services. But, increasingly that is changing with the exodus of residents from Cook County to neighboring counties and states that offer lower levels of taxation.

After contemplating this example, the following quotes of Adam Smith should make sense, even to die hard "progressives."

"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest." and "I have never known much good done by those who affected to trade for the public good."

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