One of the central insights of Karl Polanyi's The Great Transformation is that subjecting a society to "pure" market mechanisms would result in the "demolition of society."

When it comes to housing, I can't help but think we're seeing that unfold before our eyes right now.

Polanyi recognized that there are commodities—items produced for sale; and "fictitious" commodities—items not produced for sale but nonetheless subject to market mechanisms.

The fictitious commodities he focused on were land, labor and money. The first two, he said, were simply the basic, fundamental "stuff" any given society is comprised of, no matter how simple or complex, and turning them into commodities was a completely artificial undertaking from the start. Stone-age societies living in the Amazon rain forest have land and labor. Neanderthal societies had land and labor. But they didn't have markets as we know them (note markets as opposed to trade).

In the case of money, it's an artificial commodity created by centralized states which is absolutely necessary for markets to function, but letting its value be determined by market forces alone paradoxically leads to market crashes (as cybercurrency advocates are currently finding out). Land, labor and money did not behave like true commodities, therefore, except with massive government manipulation.

One of the reasons why land and labor are fictitious commodities is that they are vital for survival. You need to sell your labor in order to survive. You can't not sell it unless you have some other source of income. In the case of shelter, you need it in order to not die of exposure. It is a fundamental human need. For a true market to function, you need to be able to walk away. Therefore, these things cannot be subjected to "pure" market mechanisms, or else massive suffering would result. Because they are vital, "interference" in these markets is inevitable. If it is not forthcoming—if those items are distributed solely by market forces alone—society would gradually decay and collapse. Therefore a fully self-regulating market economy is a "stark utopia" that can never be realized in practice, Polanyi said.

But that hasn't stopped us from trying.

Fred Block and Margaret Somers are the best modern interpreters of Polanyi. They write:

Polanyi argues that to create a self-regulating market economy, labor, land and money must all by subjected to market mechanisms. He calls these the nucleus of a culture "formed by human beings, their natural surroundings, and productive organizations." Labor and land are "no other than human beings themselves of which every society consists and the natural surroundings in which it exists."

Since commodities are things that are produced to be bought and sold on the market, none of these three vital social entities are true commodities. To include these fictitious commodities in the market mechanisms means to subordinate the subsistence of society itself to the laws of the market. Polanyi argues that this theoretical sleight of hand places human society at risk as it threatens to annihilate the human relationships on which society rests.

Polanyi recognized that some things should be held outside the market. He noted that there are many distribution methods besides markets that societies have implemented over time. Historically, markets were used to distribute surplus commodities and luxury goods for the upper classes, while fundamental needs were taken care of by custom, rationing, cooperation, or some other mechanism.

Every society prior to our own has recognized the need for governments to be an essential part of the provision of shelter. Every society prior to our own has understood that only by collective action can full housing be achieved, and that this was a fundamental—indeed essential—role for government to play.

Every society until our own, that is.

Hopefully you see where I'm going with this. All of the discussions surrounding the housing crisis are predicated squarely on free-market fundamentalism. But what if that's the problem?

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Lets take a moment to think about what markets are for.

Markets have a couple of virtues. They allow for decentralized production. The price system allows independent producers to coordinate their activities independent of any centralized authority, as long as money holds its value. That was the role of the state: to ensure that this "artificial commodity" of money was supplied in sufficient—but not excessive—quantity. This role is delegated to privateering banks in our society, as I've noted previously.

Markets also allow for real-time feedback of consumer preferences. They tell producers what to produce and how much to produce, and which production to curtail. Without such a feedback mechanism, production is divorced from actual consumer demands resulting in inefficiency. No centralized authority can be a good enough director of production without such feedback, which is what hampered the Soviet Union in its later days.

(Incidentally, for all the hand-wringing over inflation, it is simply the market working as it should. Due to the pandemic, people wanted more goods and less services—less hotel rooms and more home renovations—and supply could not keep up. Eventually, the signals were processed, producers adjusted their behavior, and inflation started coming down, just as it's supposed to.)

But for this to happen, certain conditions have to be true. You need to be able to scale production up and down rapidly. People need to have a choice whether to buy something or not. You also need to be able to move distribution from places of low demand to places of high demand. Goods have to be consumed and not hoarded.

To see why this is so problematic with housing, a parable from Economics 101 might be helpful.

In the early modern period, there was a great debate in Western Europe over whether to subject grain (i.e. corn) to market mechanisms.

Grain was the fundamental food source on which society depended. While it was not the only food source, if there were enough grain, people could at least survive. If there were not enough grain, people might starve. For this reason, authorities throughout Western Europe strictly rationed grain because if people could not afford grain, it would lead to riot and revolt.

But free-marketeers had a different idea. They noted that some places would have poor harvests while others might have a bumper crop. Rationing meant that places with poor harvests had to distribute smaller amounts of grain to their people, while in other places the excess went to waste. Instead of rationing grain, they said, why not let self-regulating markets distribute it instead?

They argued that in places where there were shortages, the price for grain would be high, incentivizing producers to ship more grain there increasing the amount and forcing prices down. In places with a bumper crop, by contrast, oversupply would sink prices incentivizing producers to ship the excess grain off somewhere else to where it would command a higher price—the same places which had suffered poor harvests. In this way, grain would be distributed more efficiently than by rationing.

This is a vast oversimplification, or course, but in the end the free marketeers won out. Grain was distributed much more efficiently, making famines a rare occurrence throughout Europe even in the face of rising populations. It also provided an incentive to invest in the latest innovative production methods, since the surplus could be shipped elsewhere for a profit. There were some notable exceptions, or course, such as Ireland in the 1840s where food was shipped out of the country to places where it could command a higher price while the people who lived there starved because they had no means to earn enough money to pay for it.

Now, this is normally presented a triumph of free market fundamentalism in Econ 101 courses. But the reason I'm telling you this story today is because the same thing applies to housing. Right now due to economic and demographic changes we have too many abandoned homes in one part of the country, while at the same time there is too much demand for housing in other parts of the country relative to supply. All we have to do is let the pricing mechanism work it's magic as high prices will cause housing to move from where there is an oversupply to where where there is a shortage, just like with grain, solving the problem on its own.

Oh no, wait, no. That's not how it fucking works!!!

You would think this would be obvious, but somehow it's not. That alone should tell you that houses aren't just like any other commodity, and that’s the real reason I'm telling you this story. Most people don't live in mobile homes, after all.

The inherently artificial nature of real estate markets was recognized by Polanyi, as Block and Somers describe:

Governments create markets in land in the first place by establishing property rights, conducting land surveys, creating localities with specific boundaries, and enhancing the value of certain plots of land by building appropriate infrastructure such as roads, canals, parks, and other urban amenities. And most importantly, predictability in the market for land requires sets of rules as to what types of economic activity are permitted or prohibited in particular localities. One would not expect the supply and demand for suburban real estate to reach some kind of equilibrium level if residents were each allowed to begin smelting coal in their backyards.

But there are a multitude of other reasons why houses aren't like other commodities.

Houses are not consumed. They exist longer than a single individual's lifetime. The houses my grandparents once lived in are within walking distance of me. My grandparents, on the other hand, are no longer around. Many people have lived in the house I occupy now. This means houses are different than other commodities. It's unrealistic for a corporation to buy up all the food a community needs and drive up the prices such that people starve. It is entirely possible for a single landowner to buy up all the houses in a community and raise pries to what the market will bear. The only other option is for people to move away (or become homeless).

And it's not like you can go down the street and buy from another seller. If a big box store tried to hike the prices for, say blenders, some other store could just mark them down and scoop up all the business. But it doesn't work that way with real estate. Rising prices cause rising prices. No one wants to undercut the seller next-door to get more business, because selling a house is a one-off affair. Every seller benefits from rising prices.

Only one house can exist on a given parcel of land at a time. To build something new, you need to tear down what's already there. Land—especially urban land— is an inherently scarce resource, and it's value is socially—rather than individually—determined. The rising value of a house has little to do with the house itself and more to do with its surroundings, as Henry George realized. That's not the case with true commodities such as furniture or blenders.

Houses cannot be built quickly enough to respond market signals, especially if there are shortages of labor and materials as we saw last time, because there is a long process of acquiring land, design, permitting, and construction. They're not like widgets which can easily roll off an assembly line like N-95 masks during a pandemic. Even cars can be cranked out faster or slower and shipped to where they are overpriced (as can used cars). Houses cannot. Nor is there recourse if supply overshoots demand. Unlike cars or grain, you cannot ship the excess supply somewhere else; houses can only be torn down at a loss.

Housing is as much a social artifact as a commodity. People often live where they do specifically to exclude other people. That’s especially true if you live in the United States where schools are funded by property taxes. Exclusion is kind of built in by design. The idea that people should have not have any say in what gets built around them is not only crazy, but unrealistic. Construction anarchy is simply intolerable, and untenable. That's not the case for cars or shoes or cell phones.

And we've not only turned housing not only into a fictitious commodity, but a a fictitious investment. Investments are things specifically designed to go up in value like stocks and rare art. But people don't need stocks or rare art in order to survive. There's nothing inherent about shelter that requires it to be commodity. In theory, housing values should go down in value due to laws of entropy unless it is massively upgraded. And it's not an investment everywhere: “houses in Japan depreciate in value exponentially faster than those in America, Great Britain and other parts of Asia. In fact, Japanese houses lose all of their value after just 30 years, while half are expected to be demolished after 38 years.”

Any "investment" is more valuable the rarer it is. That's why stock splits are bad for investors, and why loans are taken out to buy back stocks. So long as housing is considered to be an investment, people who make money off it will do everything possible to make it as scarce as possible to drive up its value, just like with stocks or artwork. That incentive is built into the way we provide shelter in this country (and many others). It's funny how neoliberals always love to talk about incentives, but somehow people are supposed to behave like altruistic angels only when it comes to housing? Really? Houses can be affordable, or they can be investments, but they cannot be both.

All of this hopefully demonstrates why the idealized supply and demand graphs shown in Econ 101 textbooks are not applicable to something like housing, despite the media insisting that it's all just a question of supply and demand, nothing more.

We need to ask ourselves, does free market fundamentalism even work with a fictitious commodity like housing? Will it solve the problem? Or is it fundamentally at odds with solving the problem?

This article from the Berliner Zeitung lists several reasons why simply building more dwelling units alone won't solve the housing crisis.

1.) Private developers need to make a profit. Therefore they are unable to provide affordable (that is, below market rate) housing. We also saw last time how the profit motive drives houses to be ever larger, regardless of consumer desire or affordability.

Private developers simply don’t build affordable housing. And the stats show it. Private developers simply won’t and can’t build affordable housing that isn’t subsidised...Private housing is built by developers who need to see an immediate profit on what they build. As land prices rise due to scarcity, developers thus need to inflate the purchase price to match.

So in the end, most of what gets built is luxury housing or condos for sale. This luxury housing glut is so bad, that in New York around a quarter of all condos built in the city have remained unsold. Of some 80,000 new housing units that opened up in Los Angeles over the past four years, 91 per cent were unaffordable to those with moderate income.

2.) And, in fact, new market rate construction actually raises the rents and prices for nearby houses and apartments rather than lowering them, leading to widespread displacement. Thus, the "affordable" housing ends up being far away from the places where people live and work, exacerbating economic segregation rather than mitigating it:

Luxury construction, and even market-rate new builds, bring wealthy in-movers rather than creating new housing for working-class residents. The new buildings operate as gentrification signals, spurring landlords to renovate their apartments so they can raise the rent and kick their tenants out.

Numerous studies show that this leads to rising living costs and the mass exodus of lower-income residents. This doesn’t just affect low-income residents, a recent study at the Humboldt Universität found that one out of every four moves in Berlin is caused by displacement. In California, the situation is so dire that the black population in Berkeley declined by 30 per cent between 2000 and 2018...

“But extra supply will still help lower rents!” is the typical real estate lobby response. And there is evidence that market-rate, luxury apartments can help lower median rents. Yet this is at the regional level and only after significant displacement. Further, these effects take decades and are not proven to provide affordable housing...

3.) There are more profits to be made by housing speculation that by housing development these days. In fact, keeping houses and apartments scarce helps keep profits high. Why build more units if it will cause your speculative investments to be worth less? Again this is not the case for clothing, shoes, cars, food, computers, etc. Computer chip manufacturers don't throttle back production to make existing computer chips worth more; neither due clothing producers, and so on.

Around the world, an unprecedented amount of money is being used to buy up existing housing and property to speculate or use as a financial asset. Between 2009 and 2015, London saw over $100 billion flow into the housing market from foreign investors—used to purchase existing homes and property. Here in Berlin, more than $200 billion was spent over the last decade on purchasing existing apartments and land—compared with the $18 billion spent on building...

Back in the UK, over 500,000 unbuilt plots with construction permits blight cities and the countryside. In many places, there are plenty of plots to build on. But it’s often more lucrative to speculate on empty land or existing housing. Affordable housing is being financialised and destroyed faster than it’s being built...

Blackstone, one of the world’s largest asset management firms, broke dramatically into the US and European rental markets, buying up mortgages in the wake of the financial crisis. In the process, they have become the largest private landlord in the US. They recently spent $5.6 million to help kill prospects of rent control in California in 2018. In Barcelona, 95 per cent of their rental units charge above the neighbourhood average...

In other words, trickle down housing is not a solution. Trickle down housing (or "reverse musical chairs") is as effective as trickle down economics: which is to say, it's good at funneling money to the top. Of course economists and neoliberals like it, because it comports with their ongoing efforts to create a free market utopia, no matter the social cost. But it will also increase segregation, pushing vulnerable populations out of cities away from access to good jobs and education and where cars are needed to survive. And it does nothing to help homeless and vulnerable populations.

No wonder neoliberals like it so much.

For all those reasons, I'm skeptical that the housing crisis will be solved by the predominant "just build more" free-market fundamentalist paradigm. Housing is a fictitious commodity, not subject to idealized supply and demand curves, which are mostly fantasy anyway.

There is a solution, of course, a solution that's been historically proven to work—massive government investment. In fact, it's the only thing that's been proven to work, despite what the media will tell you. Only decommodification of housing has a proven track record of making sure that even private housing remains affordable for the majority of citizens and that everyone has access to adequate shelter.

The quintessential example here is Vienna, which has long recognized the important role government has to play to ensure enough affordable housing going all the way back to "Red Vienna" when socialists took control of the government.

Looking at the models of more equitable cities, you don’t need to look further than Vienna, Austria. It regular tops rankings of the world's most livable cities, in large part due to its immensely affordable housing.

The secret? 62 per cent of residents live in social housing, half of it owned by the city. Eight out of ten apartments built in the city today are subsidised by its social housing scheme, with the majority built by non-profit housing associations.

Helsinki, a Housing First city, has bucked rising homelessness trends by simply guaranteeing homeless people housing. These approaches are a far cry from speculation-first models that have turned metropolises all over the world into gilded cityscapes of corporate chains and under-occupied luxury apartments.

(Oh, and by the way, public housing in Austria looks better than the cookie-cutter podium-style 5+2 apartments built by developers for affluent people over here, all of which looks mostly the same. See the image at the top (source), for example.)

I encourage you to watch the following video which explains how this works, and what's wrong with current approaches to fixing the worldwide housing crisis:

Governments can act as a developer just as surely as the private sector can. And the resources it employs—the designers, builders and so on—are privately-owned businesses which employ people who will go out and spend that money, stimulating the economy.

The government already manipulates the price of agricultural and other commodities by buying up excess capacity and selling it off when there is an oversupply. Why can it not do the same with housing? As the video above shows, non-market housing can act the same way as a "buffer stock" to help keep rents and prices affordable, especially in big cities. As MMT acknowledges, the government always plays an essential role in setting prices throughout the economy due to its size and purchasing power. The government could lower the cost of shelter tomorrow if only it wanted to. It doesn’t. Instead, housing assistance is largely a subsidy to private landowners. Recall from last time that real estate is the largest source of investment for members of Congress.

Of course, governments will not be the only player in the market—the private real estate sector will still provide the vast majority of housing. Private ownership is not threatened in the slightest. In a country as big as the United States it is not realistic for governments to own all the land as it does in the free market paradise of Singapore. And as the video above notes, restricting the supply of private housing by placing too many restrictions on developers can cause other problems as seen in Hong Kong. But non-profit housing can ensure that supply is not artificially constrained. Note in the video above how the Canadian government simply stopped building non-market housing after the neoliberal revolution, in contrast to the previous post-war period. I'm sure the same thing is true all over the world (I can't find statistics for the the U.S.).

And it's not like there's a shortage of money. The most recent military budget gave the military an extra 45 billion dollars above what the Biden administration asked for, no questions asked. Yet funding for non-market housing has been consistently stripped back. It's not like the government doesn't have assets either—the Pentagon cannot account for 60 percent of it's 3.5 trillion in assets. Where is that money?

Why can we build military bases but not apartment buildings or houses? Why can we not "afford" the only thing that's been 100 percent proven to be effective in lowering the cost of shelter in an equitable manner? Instead we are told that houses are just another commodity driven by supply and demand and that the "free market" will solve everything if only we deregulate and become YIMBYs. How well has that worked with education and health care?

There are other approaches as well such as rent control and enacting restrictions on how much property investors can own, as well as how much foreign captial can own. Remember that real estate markets are inherently artificial—there is nothing “natural” about them, as Polanyi recognized. Recall also that shelter is a basic human need.

The idea that government should stand by and adopt a "hands off" approach, and the market alone will provide sufficient shelter for all its citizens—especially in a grotesquely unequal boom-and-bust economy like ours—is, to put it bluntly, fucking insane. As I said before, no society before neoliberal brainwashing would ever believe such a ridiculous thing. All of this is part of the great neoliberal project to hobble governments worldwide and force us all into impersonal markets which are largely owned and controlled by One Percent—the same wealthy, vested interests who fund political campaigns, the media, and economics departments.

So I don't think there is a solution. It will just get worse and worse forever, and more and more money will be transferred upward to landlords and rentiers from the rest of society. If there's any silver lining, the lack of affordable housing (and affordable child care, and paid time off) are driving birthrates ever lower, which will eventually solve the problem on its own, barring mass immigration.

With nearly every major problem today, there is an anti-neoliberal solution that has been historically proven to be effective. Those solutions are always deliberately obscured and disparaged by the free-market fundamentalism pushed by governments and the media. It’s too bad those solutions will never, ever happen.