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February 24, 2015


Luis Enrique

I don't understand the connection between diminishing returns and Ricardian rents. Can you explain a bit?

Luis Enrique

what I mean is, if you are optimistic about growth, you might still think landlords will capture the surplus, or conversely you might be pessimistic about growth but not buy the arguments about landlords. I don't see how the prospect of the economy running into diminishing returns says anything about who gets the bigger slices of the pie.


I have read elsewhere that secular stagnation is to be understood in terms of what drives “growth”. (I can’t remember where though – something about underrating sociological factors in favour of technology). Anyway, being a grandparent I’ve a keen interest in intergenerational justice – though from my perspective the very idea that there is an economic intergenerational conflict is a load of old tosh. Perhaps more precisely, I see this as a spurious notion which only serves to divert attention away from how little of ‘our’ wealth is being invested in ‘our’ future.

Chris Purnell

The late 19th C. also saw extensive deflation, which stripped out gains from New World agriculture. Perhaps the two world wars were the ultimate economic stimulus especially when endemic wars followed through the latter 20thC?


Whoa there! Luis - I agree.

ps land prices are where it's at.
pps people are waking up - lots of anger out there, matter of time until it migrates from the net to the streets.

Luis Enrique

I guess if you say most of the games ns from tech progress aren't monetised, then landlords can't capture them. However if you think more in terms of tech progress meaning producing stuff more cheaply, raising real incomes, then you could still claim landlords gonna capture that. I write this not entirely confident I understand the arguments why landlords would capture any surplus


@ Luis - Ricardo's theory was about agricultural land, but I'll translate into house prices.
As population grows and/or incomes rise, people want better housing - say, ones in nicer areas. However, the supply of good houses is fixed: there aren't that many mansions in Hampstead. This means that house prices in Hampstead rise a lot: owners of the existing ones get much richer. Folk who can't afford to live in Hampstead thus try to buy in Kentish Town instead, thus pushing up prices there. People who can't afford to live in K.T, then move to Hackney, pushing up prices there. And so on. In this way, owners of houses benefit, and renters end up having their post-housing income squeezed by rising rents.
This is a story about diminishing returns; "inferior" areas yield less amenity than Hampstead.
It's also, implicitly, a story about the absence of technical change. Imagine teleportation were invented, so folk could live anywhere whilst working in London. Houses in (say) the Cotswolds, Lake District & Rutland would then become substitutes for Hampstead houses. Prices of the latter would thus fall.
This shouldn't sound too fanciful; when the Metropolitan line opened in the 30s, houses in Harrow became substitutes for those in central London, so the latter fell in price.


The more efficient we get the more disposable income we get and the more credit banks are able to make available. Because housing supply is below demand we bid against one another up to our limit (which is set not by wages per se but by bank lending multiples).

No matter how productive we become it simply creates a greater surplus for us to extract. Now the trend is for everyone to work all hours which all plays into the rentier hands as we all work longer for no more wealth.

A dire situation.

Luis Enrique

thanks for explanation Chris.

thing is, what you describe there has ever been thus. I can't see connection to secular stagnation which is idea that rate of technical progress has shifted down (and is losing the battle against diminishing returns at the macro level, not in the housing market)

(I'm not sure about the whole idea of diminishing returns in housing either - what sort of returns, to who, from doing what? Yes houses in less desirable neighbourhoods yield less amenity, but that's about different varieties of good. Where are the returns? Society-wise, we'd be get diminishing returns from building new homes in ever less desirable neighbourhoods, but as you describe the process of gentrification creates newly desirable neighbourhoods too. Also - an unrelated thought - this will all look rather different once the population starts shrinking at some point)


Indeed a dire situation, the solution is to limit bank multiples and stop the Government inflating house prices through policies like help to buy etc.

Property owners are part of George Osbornes client state in the South East.

Housing is a ponzi scheme dependant on ever rising house prices. The population is only rising through immigration, as is GDP.

The Government deliberately drives rising house prices and therefore the expectation of capital gains.

It is a matter of policy not economic logic.

Ricardo does not apply as housing is unproductive (so no surplus - in fact the opposite, maintenance and interest - to capture) other than artificial capital gains.

Desire for a better house, does not necessarily require more land, as we can build upwards or downwards and price does not reflect the quality of the building, just it's market value.

Housing could be a Giffen (paradox) or Veblen good. Transport (where provided) can be a substitute for proximity (of housing) to work, but there is a limit to travel time.

Of course the concentration of wealth in the South East is a product of Government policy.

Shelter is an essential.

Giffen Goods:
1. the good in question must be an inferior good.

London - Not all housing is high quality.

2. there must be a lack of close substitute goods.

Transport; but this is limited (and expensive) too.

3. the goods must constitute a substantial percentage of the buyer's income, but not such a substantial percentage of the buyer's income that none of the associated normal goods are consumed.

London rents.



Early on I thought buy-to-let was a cunning ruse to entrap a rentier class for later plucking, it wasn't, it was just greed with no plan. The Green Belt would make sense had it incorporated an expansion plan - it didn't. The tech dream seems to require two kinds of people - the clever and the creative. But these can be drawn from a worldwide pool and each country only has a limited pool - think Bell curve. Which leaves what to do with the rest and a problem with paying them.

Within 20 years the boomers will start dying off, so straitened times till the party starts - unless their wealth stays locked up. A return to a Regency condition of society but with fewer prospects.


I'd give every penny I've got, including my pension and mortgage free house, and borrow as much as I could to be 20 again, instead of nearly 50.

Icarus Green

The problem is not just the fixed nature of land bar transport technology.

The planning rules for London are ridiculous. Have a look at spatial 3D models of population spread around the core compared to say, mumbai, shanghai or New York. Its so wasteful with land.

A city with London's population and wealth would have a much higher skyline anywhere else in the world.

Boy, its you know, almost like they designed the rules to depress housing supply on purpose.

Hopefully when all the NIMBY boomers die off there'll be nobody for the conservatives to pretend they're appeasing when protecting these regulatory oddities.

Dave Timoney

The suggestion (made by Luis) that secular stagnation means that the "rate of technical progress has shifted down" is debateable. An alternative view is that technical progress is just as rapid (or even accelerating) but that the unit cost is deflating due to a compositional change in technology, specifically the impact of software.

This is leading to surplus capital (because innovation is insufficiently "wasteful" and network effects lower the cost of expansion), low interest rates (the capital surplus amplified by increased savings due to demography and developing nation growth), and the diversion of savings into property (the search for a safe store as much as for yield).

In this light, London planning regs and the investment in transport are designed to maintain values, not to undermine them. For example, as a high-speed railway, HS2 will (unlike the Metropolitan line) benefit a relatively few, wealthy commuters. Some bankers will relocate from Amersham to the Forest of Arden. They will be back-filled by wealthy bods in Central London moving out to start a family in Bucks. They will in turn be back-filled by wealthy foreign investors seeking a London safe-deposit box.

As an aside, the point to remember about teleworking is that if it were going to radically change economic geography it would have done so by now. The bulk of teleworking is not cottage-based laptop-users, but office-based workers on the move with a smartphone.

Technology is losing the race with diminishing returns at the moment because the rate at which it recyles capital to labour has fallen. We tend to think of this in terms of a lack of demand for labour (e.g. job polarisation and growing inequality), but it is equally a lack of demand for capital by new technology.


Yes, get the point that economic growth means that pay as you go is a better deal than self-funding.


The issue, as with so many things, is that oldies and youngsters (or at least some youngsters) are disagreeing about how things will work out in the future. The oldies are optimist and the youngsters are pessimist.

But in this case there is a twist: If the oldies are wrong, they are very unlikely to find out, since they are very unlikely to be around when the youngsters are of pensioner age. In other words, there will be no penalty for their future selves if they get it wrong. While youngsters expect to be around when they are of pensioner age. This partly explains the bias of oldies. The other reason for their bias is that their own lifetime experience has been the economy always going upwards. So on balance, I suspect oldies are more biased, and youngsters more likely to have correctly estimated the odds.

I say this as a middle-aged person trying to work out who is most likely to be correct.


Land value taxation needed!


@chris, I think it is important to point out that the rises in house prices (well, actually land prices, the house costs pretty much the same, it's the cost of the land it occupies that varies) you document are due to people with more purchasing power coming into the area, not due to demand going up, similarly the falls in house prices are due to people with greater purchasing power leaving the area and being replaced by people with less purchasing power, not due to demand falling. Whilst it is very tempting to assume, as in some of the comments on this post, that increasing supply of housing in, say, London, will bring house prices down, the historic evidence is that it will have no effect: building more houses just means you have many more houses at the same price as before. If there are too many, they remain unsold, pre-crash Spain and Ireland being good examples of this.

@FATE, AFAICS, the whole point of HS2 is to bring the area around the northern end of the line within commuting distance of London and therefore make a few landowners hugely wealthy from the expenditure of public money. There really isn't any other explanation for the high line speed that increases the cost of the project by so much and the lack of intermediate stations.


Yes, you have to strip inflation figures out of GDP growth figures, and then you see that there is little left. Even in the last 50 years.(http://occidentis.blogspot.co.uk/2011/11/growth.html) But I do not want 'growth' of anything: population, GDP, housing supply. Steady state should be our objective. Even the lengthening of life-span seems a dubious advance.

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