Driven by data; ridden with liberty.
Economics interactions are sometimes played into moral dramas. There are often complaints blaming high rental prices on “greedy landlords”, low wages on “bad employers” and rising oil prices on “unscrupulous traders” and “unscrupulous oil dealers”. Rising electricity and gas prices are often blamed on a shadowy cartel of energy companies, though no evidence has been found of such cartelisation. Locally, during the debate over Bath’s Article 4 Direction, a major fixation for Bath & North East Somerset councillors has been the supposed immorality of buy-to-let landlords.
Usually a part of pernicious populism, this worldview argues that prices are set volitionally, by the choice of the seller alone, or with massive weighting towards the seller, rather than systemically. The belief in volitional pricing, as examined in Thomas Sowell’s Intellectuals and Society, does not survive scrutiny.
If it were only landlords that decided rental prices, then the substantial variations in rents across the country, or even in a single city, must be explained by their decisions alone. These landlords must desire more money the closer they get to London, and there is something in the coastal air that makes Cornish landlords charge more rents than landlords in the North East. There are also strange pockets of self-indulgence in York and Manchester. According to this theory of volitional pricing, stepping southwards out of Bath significantly decreases rents, as the average monthly rent for two bedroom houses drops from over £800 to under £600.
This vision portrays negative economic events, such as recessions, as acts of villainy and moral malfeasance. The financial crash has often been talked about as if it was the deliberate machination of bankers, particularly investment bankers ‘gambling away the economy’. Michael Moore, in preparation for his ludicrous film Capitalism: A Love Story, asked for first-hand proof of this devilry: “Be a hero and help me expose the biggest swindle in American history”. These demons must be punished, as with campaigns for taxes on financial transactions, and calls to end “casino banking”.
Claims about the demonic forces of investment banking are rarely tested. The first British bank to fall was Northern Rock – a retail bank. The Parliamentary Committee on Banking Standards’ report into the failure of HBOS found:
HBOS has no culture of investment banking; if anything, its dominant culture was that of retail banking and retail financial services more widely, areas from which its senior management were largely drawn.
Professor Steve Horwitz says: “Prices are an incentive wrapped in knowledge”, providing information about supply and demand, such as production costs and a complex web of trade-offs. Customers have the choice between different providers of their desired product, and those companies are rewarded for providing goods and services. Prices are a result of these systemic interactions and are reflective of the underlying economic reality, rather than reflective of the seller’s malice. The vision of volitional pricing often leads to campaigns for price controls; adherents believe they are simply scrubbing out one volitional price and scrawling in another: one set by government.
Note: I am currently writing my PhD thesis, so I will be updating this blog with one or two posts a week.
Update: I’ve re-written the third paragraph to highlight that I’m rebutting the idea that sellers alone decide prices, rather than just sellers are greedy, which is a common explanation in this vision.