Knowledge And Decisions

Rent control illustrates not only the ease with which political systems can distort the transmission of knowledge in an economic system. Its history also illustrates how difficult it is for effective feedback to correct a political decision. Political decision making units are defined by geographic boundaries, not by particular subsets of people who experience the consequences of given policies. Rent control laws passed decades ago to benefit “New Yorkers” or tenants in New York were initially judged through the political process by incumbent New Yorkers and incumbent tenants, on the basis of the prospective plausibility of such laws. A generation later, deaths, births, and normal migration in and out of the city mean that the electorate has turned over considerably, and very few of them have personally experienced the effects of rent control from start to finish. Many of those who actually experienced the deterioration of housing under rent control in New York City are now living outside New York City, some as a direct result. Their experience does not feed back through the electoral process in the city. The current New York City electorate includes great numbers of people who arrived in the city — by birth or migration — when it was already experiencing the effects of rent control, so they have no “before” and “after” experience to compare. They do not know, for example, that the city once had a larger population, no housing shortage, and no masses of abandoned buildings. Their personal experience does not go back far enough to enable them to spot the fatal flaw in the argument that rent control cannot be safely repealed while there is still a housing shortage. Lacking this personal experience, they would have to be trained in economics to realize that a “shortage” is itself a price phenomenon, and so will persist as long as the rent control persists.

While time and complexity insulate many political decisions from effective feedback from the general electorate, some offsetting knowledge is furnished by groups with lower knowledge costs because they are more obviously affected adversely — the real estate lobby and landlord associations, in this case. In general, special interests have not only lower costs of knowledge of their own interests, but an incentive to invest in discovering how other groups’ interests are similarly affected, so as to acquire political allies. However, to the extent that special interest arguments are automatically discounted, this knowledge is ineffective or even counterproductive. Landlord and real estate interests, for example, provide pro-rent control forces with an enemy to fight, a sense of moral superiority in fighting, and a reassurance that they are acting in the interests of others who need protecting — though this last crucial point rests on an implicit conception of the economy as a zero-sum (or negative-sum) game. Once the economy is seen as a positive-sum game — that voluntary transactions are mutually beneficial or they would not occur — then the losses suffered when such transactions are forcibly restricted can also be mutual. The fact that the complaints issue first or exclusively from one party may reflect only his lower costs of knowledge of the effects on him.

More generally, to totally discount all special interest arguments is to implicitly assume that society is inherently a zero-sum game — which is difficult to reconcile with the fact that societies of some sort or other have existed among all peoples and ages.

The effects of rent control on the quality of housing illustrates a more general characteristic of price control and of the limits of articulation. Whatever price is forcibly set by an observer, he must define the product whose price is being controlled — and his articulation can seldom match the unarticulated experience of actual, voluntary transactors. The result is that prices set below the level that would have prevailed otherwise lead to quality deterioration. In the case of rent controlled apartments, maintenance, repair, painting, cleaning, heat, hot water and general monitoring all decline. This is less damaging to brand new buildings than to older buildings which require more upkeep to avoid becoming slums. Since low income people are more likely to live in older buildings, they are most likely to find their homes become unheated slums with uncorrected building hazards. In the extreme, they may find the building totally abandoned by the landlord, once the cost of maintaining it at minimum legal levels exceeds the rent permitted. In New York City, such abandonments average about twenty-five thousand units per year.¹⁷