Saturday, April 18, 2009

The rights and liberty at Elvisdam - Part 2

(This is slightly related to my earlier post about Elvisdam.)

The people of Elvisdam lived a peaceful life. Elvians were generally peace loving and law abiding citizens. Over the years, people came to the king for favours and general routine things. Most of the services were available in the capital city of Elam where the king resides. Soon, as the kingdom prospered, the city of Elam became the central hub of the entire kingdom. Many Elvians from other cities came and settled in the city of Elam. As a result there was huge demand for residential and commercial properties in Elam.

Citizens of Elam saw the opportunity and started building their houses as multi-storey buildings. Some were for residential, while others were for commercial purposes. Ten to twenty years ago, there were no financing for such developments from the banks. Thus the citizens of Elam saved money over the years and built their homes. Nowadays, the banks do provide loans with interest for such developments.

As the demand for the properties increased, so did the rents. This is Economics 101. There were periods when rents fell slightly. However recently, the rents have kept increasing just like price of other items such as food, clothing etc.

As a result, very recently, a petition has been put forward to the king, asking for control of the rent in Elam. The premise being that, monthly rent, deposits and advance payments have gotten out of control and the king needs to do something about it.

However, such push button solutions will not work, especially when it tries to defy economics. History has shown that such price controls results in shortages. Now it is upto the king to decide what to do, and what button to push. There are several arguments against rent control or any other price control.

1. Liberty and freedom:
How is it ethical for me to dictate a price for your fruits of labour and investment? Suppose you were doing some other economic activity such as building contruction, fishing or ordinary corner shop. What right do the state have in dictating the price charged by the contractor, or the price that fisherman sell fish or the price that cornershop sells products. After all, the contractor, fisherman and shopowner have to pay their costs of living too. This is what I mentioned in my previous post about Elvisdam.)

. 2. Price control will result in shortages:
If for example the king decides to control the residential rent, and if this rent is below market price, the landowners will only build and rent out for commercial activities (such as shops, office, warehouse etc). This will result in a shortage of residential buildings. This is the same kind of shortage that occurs for some foreign currencies in Elvisdam.
If the king decides to control both residential and commercial rent, then landowners will have to select tenants based on some criteria other than price. It might result in landowners preferring to rent out to businesses instead of ordinary people, thinking that businesses are more likely to pay rent and big deposits.

3. The king is relieved of his duties:
If rent control is imposed, the king can say he has solved the housing problem with popular support from the public. But the real problem of inadequate educational, health and other facilities remain unsolved in the other cities. This is the main reason for the influx of people into the city of Elam.

4: Does nothing to reduce the cost of living:
Almost all elvians face the problem of increased cost of living, be it in Elam or other cities. The prices of food, fuel and clothing has risen, so has rent. Part of the problem is increased demand. The average income remained the same while the prices has gone up. Some have called for controlling the prices as well. But the real problem is inflation, which is not being addressed by the king, and unfortunately there is not much call for correcting inflation by addressing its root cause-Monetising the king's debt.

The king runs a debt country. Previous kings ran a deficit budget, meaning its expenditures were more than its income. Hence the king printed the money to make room for his extravagant spending. Like any other commodity, the money loses value as more is pumped into the economy. As long as such printing is going on, there will be no stop to inflation.

The current petition will gain popular support. It will also have significant opposition. This petition cuts to the heart a majority of people. But the sad part is, popular support was there for suppressing the freedom of the shell collectors in Elvisdam. Their fruits of labour were cartelised and extensive price controls were imposed. Only the few zone holders reap the benefit of the work of shell collectors. But they (the shell collectors) were a minority and lacked political backing, hence they have been deprived of their fundamental rights. Now it is happening to the powerful people, look how much it will be debated.

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