The French philosopher Frederic Bastiat suggested that the distinction between a good and bad economist is that the latter merely examines the seen effects of an action whereas the former, the good economist, examines the “unseen” effects too – or those effects that are not immediately obvious. In a sense, Bastiat is saying that bad economists do not exercise the virtue of prudence.
When it comes to economic policy, technical knowledge is sometimes necessary when coming to a prudent view. Often there will be no dispute about ends, but some means to achieve a given end will be more imprudent than others. Indeed, if we attempt to achieve a good end by a bad means, we may actually move further away from the desired end.
We could take the area of housing as an example. I don’t think any person of goodwill would disagree with the statement that we want all people to live in adequate and affordable shelter. It is also widely accepted that, in the UK, the cost of housing (either rents or the cost of buying) make life extremely uncomfortable for many people. Indeed, the cost of housing may well stop people from marrying and having children.
There may be some people who value the natural environment so highly that they believe it is better for housing to be more expensive and for less land to be used for building. For the sake of this blog post, I will focus on those who believe that the end should be more affordable housing.
Many politicians believe that it is a good idea to pursue this end by controlling or capping rents. If we control rents or rent increases, the argument goes, housing will be cheaper, especially for those (normally poorer parts of society) who wish to rent houses. In my view (and in the view of 93 per cent of economists) this is a very imprudent policy.
Rent controls almost always lead to an increase in demand for rental property and a reduction in supply. Landlords take property off the market in order to sell it, or people who rent out individual rooms in their house decide that the reduced rent means that it is not worth the inconvenience. New landlords do not come into the market. Very often, tenants are bullied to leave properties so that landlords can sell up (the phenomenon known as “Rachmanism” after the notorious landlord Peter Rachman who did just that when we last had UK-wide rent controls). Properties are allowed to fall into disrepair because vacancies are easily filled – there may be waiting lists of years for a property.
The result of all this will tend to be queues for property, a black market or use of bribery or networks to jump the queues and, ironically, a decrease in house prices (that benefits better off owner-occupiers) as properties previously let out are sold. People who are lucky enough to obtain a property will tend not to leave (thus reducing mobility) because they may not be able to get another property if they do move, and they may occupy as much space as they can get hold of at the capped rents.
There is a raft of studies and examples that show that these things happen when rent controls are introduced.
We do have some experiments going on at the moment. Scotland has introduced partial rent control, and it has led to some of the above problems. Indeed, in this case, rent controls have not even achieved their declared objective. Rents have risen by 14 per cent in the last year. More predictably, homelessness is three times the UK average.
But, to return to the original point: “Prudence is the virtue that disposes practical reason to discern our true good in every circumstance and to choose the right means of achieving it”. In this case, there is widespread agreement about the aim – just disagreement about the right means to achieve it. Economists would argue that support for rent control arises from faulty or incomplete reasoning. The divide is not between the left and those who support markets, according to most economists, but between those who have followed through the likely consequences in greater depth and those who simply look at the first-round effects of capping rents. In other words, between the prudent and the imprudent.
There is still plenty of room for disagreement about housing policy between those on the left and those who support a market economy, even if capping rents is rejected. Those on the left, for example, might support more social housing or greater rent subsidies for the poor. Those who support a market economy might support the liberalising of house building. My own proposals are outlined in this paper for Caritas Social Action Network which has forewords by members of parliament from each of the main political parties:
Lord Shipley, of the Liberal Democrats, states that “every citizen has the right to good education, a decent job and a secure home” in his foreword. Never in recent history has it been more important to apply to the virtue of prudence to ensuring that everybody can access a secure home without its cost preventing them from obtaining the other things necessary for a decent life. It is because of the importance of the end that it is so important to use prudence in determining the means to achieve the end.