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Tuesday, May 17, 2011

The Psychological Consequences of Rent Control

Fostering dependence on the State.

The University of Chicago Press has published a new “definitive” edition of F. A. Hayek’s The Constitution of Liberty under the editorial guidance of long-time Hayek scholar Ronald Hamowy. Given my interest in urban issues, it’s a good time for me to focus on chapter 22, “Housing and Town Planning.” It has several insights that I really like, but given the constraints of this column, for now I’ll talk about Hayek’s take on rent control.

I must confess that it was several years after I became interested in the nature and significance of cities that I learned that Hayek had written anything on what we in the United States call “urban planning.”  (Well, that’s not quite true; I did read The Constitution of Liberty as a graduate student, but in those days I didn’t appreciate how important cities are to both economic and intellectual development, so it evidently made no impression on my.)  The analysis has a characteristically “Hayekian” flavor to it, by which I mean he goes beyond purely economic analysis and points out the psychological and sociological impact of certain urban policies that reinforce the dynamics of interventionism.

The Economics of Rent Control

Hayek’s economic analysis of rent control sounds familiar to modern students of political economy perhaps because it’s so widely (though not universally) accepted.  This was hardly the case in 1960, when his book was first published.  Hayek points out that despite the good intentions of those who support it, “any fixing of rents below the market price inevitably perpetuates the housing shortage.”  That’s because at the artificially low rents the quantity demanded exceeds the quantity supplied.

One effect of the chronic housing shortage that rent control produces is a drop in the rate at which apartments and flats would normally turn over.  Instead, rent-controlled housing becomes a family heirloom, handed down from generation to generation.  This is common in rent-controlled Paris, Vienna, London, New York, and Berkeley.  Over time, of course, rent-controlled housing becomes shabby as landlords skimp on repairs and renovation because costs exceed revenues.  But Hayek focuses on another, more pernicious effect.

The Psychology of Housing Policy

People adjust to changing circumstances any way they can.  Without flexible prices reflecting relative scarcity and guiding rental decisions, landlords and renters will use whatever resources at their disposal to allocate the available supply.  But public authorities will also adjust as they see this “chaos” — of their own making — and will use their authority to ration housing according to their “superior” judgment.  It’s this use of government authority to determine who lives where that opens a new dimension to the dynamics of their intervention. Hayek wrote:

It is not the material damage, however, that is the most important.  Because of rent restriction, large sections of the population in Western countries have become subject to arbitrary decisions of authority in their daily affairs and accustomed to looking for permission and direction in the main decisions of their lives….

What has done so much to undermine the respect for property and for the law and the courts is the fact that authority is constantly called upon to decide on the relative merits of needs, to allocate essential services, and to dispose of what is still nominally private property according to its judgment of the urgency of different individual needs.

People get used to depending on government for something as central to their lives as housing, whether in the form of rent control or public housing (which carries its own set of dangerous consequences), which in turn shapes their expectations about other areas of at least equal concern, such as jobs and health care.

This phenomenon is a main point of his earlier and better-known book, The Road to Serfdom (1944), about which he says in the foreword to a later edition: “[T]he most important change which extensive government control produces is a psychological change, an alteration in the character of the people.”

Housing Policy Today

Fewer cities today practice the sort of rent control Hayek wrote about in the mid-twentieth century.  But government meddling in housing continues in the United States and elsewhere.  America’s political leaders are fond of proclaiming a citizen’s “right to housing,” the manifestations of which have been Fannie Mae, politically driven subprime lending, and (at times) expansionary Federal Reserve policy. The macroeconomic results have been obvious and disastrous.  But let’s not forget Hayek’s “micro-social” consequences.

On the supply side, such statements about the right to housing cleverly leave unspoken the identity of the forced benefactors who must give up the land, labor, capital, and other resources needed to fulfill this right.  In the case of such positive rights, the gain of one entails at least an equal loss on the part of another, and usually more.

And as Hayek pointed out, a similar sort of zero/negative-sum game operates on the demand side.  The beneficiaries lose a sense of independence and self-determination, which is the gain of government authorities, who are now in a better position to acquire more rights and resources from a citizenry that, precisely because of the prior interventions, is ever-more-accommodating.

  • Sanford Ikeda is a Professor and the Coordinator of the Economics Program at Purchase College of the State University of New York and a Visiting Scholar and Research Associate at New York University. He is a member of the FEE Faculty Network.