Economist Janos Kornai showed us how to fix the housing crisis

Tom Spencer

October 22, 2021

The great economist Janos Kornai sadly passed away on the 18th October aged 94. He shall be remembered as the man who showed us best why socialism doesn’t work: his books Economics of Shortage and The Socialist System coherently explained how ‘soft budget-constraints’ in planned economies dampen the efficiency of the entire economic system, resulting in perpetual shortages.

Given we’re living in a post-Soviet world you’d hope these mistakes weren’t being made. However, one of the few last stands of socialism remains – the Town and Country Planning Act 1947. It’s time we finally learnt the lessons from Kornai’s life and moved on from this dreadful legislation.

Like most of the post-war legislation passed by the Attlee Government, the town planning regime appears shockingly similar to that of the Soviets. The idea was that a local authority would create a 15-year development plan and every proposal that met the plan would be provided planning permission. This created an additional discretionary stage in the planning process based on the Councils interpretation of their development plan. However, the plan wasn’t to allow private individuals to build these houses; no, the vision was that local authorities would build the majority of these houses.

The immediate effect of this was that private house building numbers were almost eliminated overnight. Despite a shortage of around 2 million homes, the Attlee Government only managed to build around 180,000 homes a year. This meant that their goal to provide, “a separate dwelling for every family that wishes to have one” wasn’t just missed – it went out for a throw-in.

And it’s no surprise to anyone who’s read Kornai why this was the case. As he wrote in his paper, Resource Constrained Versus Demand Constrained Systems, socialist systems are predisposed to shortages. This is because they suffer from what he calls soft, rather than hard, budget constraints. In socialist systems where firms receive losses, then the state will compensate that firm for their loss. This creates an incentive for businesses to carelessly expand without regard to productivity. As a result, managers will be forced to hoard what scarce inputs they do receive, at a time of stagnating or even falling productivity. This leads to a perpetual shortage.

And that is exactly what we’re seeing in housing. The Government created an institutional framework for housing reliant on a complete Government control of housing. The consequences of which were not immediate and it did have some success for a time. Indeed, the Conservative Government that succeeded Attlee not just met their target of 300,000 net additions a year – they exceeded it.

However, in the long run, shortages inevitably prevail. We saw this throughout the 1970s across the economy. Thankfully, Thatcher privatised large amounts of the economy to put an end to the shortage economy and deliver the surpluses we are enjoying today. However, the post-war era Soviet planning system remains in place. This is most obvious in London where annual housing need is 3x as high as annual housebuilding. As a result the median price to earnings ratio has grown from 6.9 to 12.52 since 2002.

If we’re ever to make housing affordable again it will need to start by changing the institutions by which we determine which houses get built. This doesn’t need mass Government intervention; in the 1930s we managed to build 80,000 houses annually just in London mostly through the private sector. 

The most likely alternative that would gather support is street voting as advocated by London YIMBY, the Adam Smith Institute and Policy Exchange. This would give each street a vote to deliver a design code, then all homes proposed meeting this code would be approved. The beauty of this plan is that it would still ensure that residents get a say in local developments, but it will be done in a way that creates an economic incentive towards building more homes.

Take the example of a cul-de-sac of 26 bungalows in New Barnet covering about 2500 square metres of usable floorspace just 15 minutes walk from both Cockfosters and New Barnet stations. If the residents agreed to convert this land into a 3 story Georgian style terraced townhouses, then the uplift would generate £44 million in additional value to the homeowners or almost £1.7 million per previous household. Even the strongest of NIMBYs wouldn’t reject this money.

Janos Kornai’s work has helped us understand the failure of socialist system better than almost any economist in history. Thankfully, in the United Kingdom we have been lucky enough to learn many of the lessons of his work to our merit. However, we’re not there yet. Our housing market still resembles the shortage economy that Kornai described in the Eastern bloc. By introducing street voting we can move past this.


Written by Tom Spencer

Tom Spencer is the Chief Organiser of the London Neoliberals and a Young Voices UK contributor.

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