In economics as in life, balance is essential - or is it?
Expecting things to just even themselves out is often wishful thinking
Vespas will always retain value – they're an investment, you see.
Well at least that’s what a guy with a second-hand Vespa for sale told me while I was looking at his (oh-my-so-cute) machine. It’s what you are expected to do if you want to sell – be it a Vespa or property.
Karma’s bitter pill
Whether you believe in deities or not, we do have one thing we tend to believe in – a sort of balance. The reasoning goes that you may be suffering right now due to (God, I love lists)
- Being a baddy in a previous life,
- Being tested by a God,
- In lieu of future benevolent outcomes, in this life (karma) or the next.
This thought is somewhat reflected in economical beliefs – that assets must have an intrinsic value that is discovered in the long run. The issue, then, is whether the value of property right now is less/more/equal to the real true value. If not, there will be some adjustment.
This is the predominant reason why communism failed: the realisation that central planning doesn’t work as well as free markets. Balance and market efficiency should result in a long-term form of harmony despite short-term chaos.
Finding your Zen
Speaking of chaos – the other main Maltese concern is traffic. Using the balance-of-life reasoning, if traffic is unbearable, more people are likely to use other forms of transport, hence alleviating the traffic which eventually finds its natural balance.
Yes, utter rubbish. We quickly realise that there must be some form of central planning to reduce traffic and improve our quality of life.
Liberal markets on their own may not be enough to produce fair, efficient outcomes, if these occur.
The obligation to intervene may be moral, not just economic - take London for example.
Transport for London (tfl) recently did not renew Uber’s licence. Many would agree that Uber has used unfair competition practices, mistreated female workers, and failed to protect workers. In a Utopia, such a corporation would be boycotted. Yet Londoners ultimately didn’t care about all this. They may have liked a Facebook page calling for fair contract terms or shared a HeforShe campaign, but nothing beats a cheap taxi ride.
Thankfully, tfl looked at the bigger picture.
Should property prices – both rental and sales – be regulated?
If we start with the presumption that a natural balance is not obtainable without intervention, then yes. But intervention may lead to adverse effects. Imagine government were to reduce taxation on property purchases up to €200,000 – this would likely lead to more property increasing up to that value.
If property is such good value, then surely the government doesn’t need to help the industry and it is not a boom-and-bust scenario.
If it is, then some brakes could be applied.
Imagine you are in a car trying to get to a destination. You may or may not be over-speeding. Do you:
- Press the gas to get there faster,
- Leave as is,
- Slow down, arriving to the destination later,
- Stop altogether
Let’s all agree that option a) and d) aren’t ideal. Maybe c) is a bit better than b), though.
The point is that using the above argument, regulation is needed in different markets but with caution. Achieving balance through regulation is not just about nudging or halting – it is not the classical two dimensional scale, where one adds some weight on one side to balance it out. It is more akin to holding a large plate with one finger while driving a car.
Let’s not treat our plates like the Greeks treated theirs.