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Prices and Location: A Geographical and Economic Analysis

Walter Block
Harold E. Wirth Eminent Scholar Endowed Chair in Economics
College of Business Administration
Loyola University New Orleans
6363 St. Charles Avenue, Box 15, Miller 321
New Orleans, LA 70118
Email: wblock@loyno.edu

 

ABSTRACT

Government housing projects, not being part of the profit and loss private sector, are able to transcend the market's tendency to locate people according to income or wealth. This increases transactions costs, reduces social cooperation, creates inefficiency, undermines incentives to amass wealth (and thus dis-enhances economic development).

 


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Economics is concerned with prices, profits and incentives; geography with spatial considerations; political philosophy of law with the normative question of what should constitute proper legislation in the free society. The overlap of the three gives rise to the interdisciplinary field of political economic geography (Block and Block, 2000).

Nowhere is there a more appropriate subject matter for this field than the in area of real estate law. In this paper I attempt to analyze from this perspective the Amsterdam Houses, a public housing project located on the West Side of Manhattan, immediately between the Trump Place Towers and the Tischman building and West End Towers to the west, and the Lincoln Center complex to the east. For those unfamiliar with New York City real estate markets, this is some of the most valuable territory on the entire planet.

The inhabitants of Amsterdam Houses are poor, mainly black, with many on the welfare dole. Their neighbors, in the surrounding high-rise luxury buildings, are anything but. Rarely is such a phenomenon found, except on the periphery of rich and poor neighborhoods. But this housing project is located in roughly the center of one of the most luxurious areas in the world. Here is a comment on this strange and unlikely juxtaposition from the perspective of the tenants of Amsterdam Houses: "For better and worse, affluence surrounds a housing project: As Trump and Tischman build towers, poor neighbors get a chance to move up" (Wall Street Journal, 10/9/00, p. 1). According to this author, in some respects there were improvements in their lot in life: employment opportunities as maids, grocery clerks, increased, as did the safety of the neighborhood. In other ways, e.g., envy of the rich, the very opposite occurred.

But the real story is that in a free society, it is unlikely in the extreme that such a geographical positioning would have ever occurred. Or if it did, through some accident, it would have been quickly ended. This is because had a group of poor people located in an area which later came into red hot demand, they would tend to be bid out of their premises by attractive competing offers. This is the typical case of urban yuppification, where rich upwardly mobile professional folk buy out the locals and others who have long occupied the area. (When the World's Fair was located in Vancouver, British Columbia, this phenomenon also occurred: hotel owners, looking to cater to the expected crowds of tourists, attempted to purchase many properties in the downtown area, in order to turf out the mainly poor people who had lived there.) Needless to say, strenuous objections to this practice were leveled by socialists. If the poor had been ensconced in a neighborhood of the city suddenly in greater demand as property owners, they would tend to sell at vastly higher prices. (The poor, too, can own property.) Had they been renters, the landlord would likely evict them in favor of tenants who could pay afford the new higher prices.

Note the effect of this process on the geographical make up of a city: it tends to bring like into close proximity with like, and to put some distance between those on different places in the economic spectrum. That is, the rich tend to live cheek-by-jowl with others of their income class, and the poor are segregated into their own areas, occupied by other members of this wealth category.

What are the utilitarian benefits of such segregation on the basis of wealth or income? One advantage is that it reduces transactions costs (Coase, 1960). Rich people are more like others of their ilk than they are like the poor, (otherwise they would likely be poor) and the same goes for members of the opposite end of the spectrum. But those who come from the same backgrounds, have a similar set of values, mores, religions, etc., tend to find each other easier to deal with than people with entirely different characteristics. This not only reduces interpersonal strife, it also enhances neighborhood cooperation; it promotes "mediating" institutions (see on this Novak, 1978, 1979a, 1979b, 1985, 1986) such as bowling leagues, churches, clubs, boy scouts, etc.

Another benefit is that the poor have no particular reason for being located in the west side of Manhattan, while the rich certainly do. Specifically, those of the wealthy persuasion are more likely to work in Wall Street, or in other business districts in this borough, than their counterparts at the opposite end of the income distribution. Even if the costs of travel were the same for the wealthy and the impoverished, it would still make sense for the former to be located closer to the center of the city, where their jobs are located, and for the poor to maintain residences in the periphery, since they latter do not work in downtown Manhattan to the same extent. But the costs of travel are highly correlated with hourly earnings. Bus or subway fare is an insignificant proportion of the total; the overwhelming majority of the costs are the opportunities forgone while traveling, namely, the wage that might have been earned during this time. By definition, this is more for those with higher hourly earnings than lower ones. (We abstract from psychic income which could conceivably turn this around upon rare occasions. For more on this see Block, 1977).

But is this "fair?" It is not immoral that the poor should be forced to vacate their domiciles in favor of the rich, especially when the latter may have been occupying their residences in these areas for years, even decades? This, at least, is the viewpoint expressed by many who object to the wholesale displacement of the latter by the former, based what seems to be either a whim, or esoteric and irrelevant economic considerations. "A man's home is his castle," might be their rallying cry -- apart from the fact that many of them are staunch feminists and would object to the use of the male pronoun in this sentence (see on this Radin, 1987; for a rejoinder, see Block, 1999)-- in this battle against the "evil" real estate developers. (It is difficult to discern why otherwise intelligent people blame the developer for a phenomenon that emanates from underlying economic realities. This is like blaming the messenger for bad news.)

There are several difficulties with this position, however. First, it is simply not true to maintain that the poor are "forced" out of their dwellings. As we have seen, if they are property owners in an area suddenly in greater demand, they leave only because they value the sale price more than their continued occupancy. As the case of the "holdout" exemplifies, the poor property owner can persist in his ownership rights, rejecting any and all financial blandishments to the contrary. In this case, it cannot be denied, the rich all too often resort to extra market techniques for evicting poor homeowners: e.g., eminent domain, or expropriation, or so called "urban renewal." However, we are discussing the system of laissez faire capitalism, and no such forms of legalized theft are compatible with such a system. The classic work on urban renewal is Anderson (1964).

As to the tenant, he is not "forced out" either. Rather, he loses a bidding war for residential space he did not own in the first place. But doesn't the tenant really own, in at least some extended sense, the apartment he occupies? (This perspective has been articulated by Radin, 1986, 1987. For rejoinders see Block, 1999, 2002). After all, we all commonly refer to it as "his" dwelling.

Suppose there is a restaurant that a poor man has been patronizing for years. Suddenly, this eating place goes "upscale," changes its menu, and doubles its prices. Has this poverty stricken individual been "forced" to seek another establishment? Not at all. Rather, he has made a choice to continue to patronize cheaper eateries. It is precisely the same in the case of the rental unit. The poor tenant is no more forced out of his residence than he was from his restaurant. He has no property rights in either of these cases. Continued patronage of either a restaurant or a dwelling owner's property confers no special privileges upon the customer. In both cases, in all such cases, the truth of the matter is that this consumer has (finally) been outbid by other customers for the good or service in question.

In like manner, it is very dangerous to infer ownership rights from the possessive pronoun. We all commonly refer to my wife, my husband, my tailor, my customer, my teacher, my student, my job, my boss, without any claims in the least as to ownership of any of these relationships.

Second, the position of the critics cannot possibly be generalized from food or shelter to all purchases, without embracing the noxious doctrine of absolute and perfect income and wealth equality. The point is, if wealth is to be rendered impotent when it comes to a choice of a place to live, why should not the same apply in all other economic decisions? And if it does, there will be little point in attempting to become wealthy, by, say, refraining from consumption and investing the saved proceeds, or by working harder, or for more hours, or working smarter (e.g., investing in education or training so as to be able to earn more and thus contribute to society to a greater degree). More strictly, this would reduce to zero all selfish motives for acting in such a public-spirited manner. Only benevolence would remain as a motivation toward these ends, surely a weak reed upon which to rest the economic well being of society. Said Smith (1776, Book I, Chapter II, pp. 26-27): "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. We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages." See also Seldon (1977) on this matter.

Third, there are also problems with a more moderate version of this thesis: allowing prices and considerations of profit to apply to "luxury" goods, such as yachts, jewelry, etc., but not to "necessities," for example, food, clothing, shelter. One difficulty is that one persons' luxury is another's necessity. Goods do not come with such labels affixed to them; rather, these are evaluations placed on them by people, and tastes do differ. Another is that under these conditions, we would soon be awash in "luxuries," while "necessities" would come to be in short supply, as economic incentives became perverse: shifting investment from the latter to the former. Why? If the businessman can earn more profits in jewelry than in milk or apples, he will soon shift interest from the one to the other.

Fourth, this doctrine is subject to yet another reductio. (For a classic articulation of this egalitarian doctrine, see Rawls, 1971; for a refutation, see Nozick, 1974). If its advocates wish to maintain that any income disparity is illegitimate, then on what basis can they defend differences in the characteristics that account for them in the first place? That is, the antecedents of diversity in wealth (it is interesting to note that the mind set which opposes diversity in income or wealth very much favors it when it comes to education, or employment, etc., on a racial or sexual basis) consist of mainly intelligence (Herrnstein and Murray, 1994; Levin, 1997) but also of initiative, hard work, artistic or athletic skills, and luck. Further, they are in no logical position to defend human differences in other things that make life enjoyable such as a sense of humor, beauty, etc.

Moreover, they embroil themselves in a logical inconsistency. For it is only as intellectuals that they make these arguments in the first place. But if human beings were leveled down to an amorphous mass, with the intelligence of all pegged at its present average, it is doubtful that anyone would have had the cunning it takes to put forth this argument in the first place. Thus the critics are relying on skills to make their point which they would not be able to call upon were their own wishes carried out.

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