Tuesday, March 3, 2009

The Neighborhood Effect or The Social Nature of a Capitalist Economy

Like many people I am appalled at the prospect of bailing out banks and feckless homeowners. And the pundits are having a field day with the notion of a rule-governed, tax-paying people--that’s us--subsidizing scoundrels and incompetents--that’s them. But much of the anger is based on the mistaken notion that our economic self-interest is undermined by such intervention. This individualistic ideology is particularly strong in the United States. And there is a very real issue of the moral hazard of the public subsidization of reckless private behavior. But we also have to be aware that our financial security and economic health is crucially dependent on other people. Let’s consider the housing crisis as an example. As an individual owner-occupier, I am concerned with the value of my home. But this value is based not only on the characteristics of the individual dwelling but also on the going price of my neighbors’ homes. If they go down in value, so do mine. The price of any home is a function of the homes around them. We can refer to this as the neighborhood effect. Foreclosures increase the number of vacant and abandoned properties and so home values, including mine, decrease. It is in our economic self-interest to have the mortgage crisis solved. And even if you live in a neighborhood untouched by foreclosures--less of a possibility as the crisis worsens--the housing market is based on long chains of purchase. House sales form chains from the top to the bottom of the market. When someone buys a property at the entry level, that enables the existing owner to sell and use the proceeds to buy a more expensive house that in turn allows the owner of a more expensive home to buy another place. A broken link has effects further up the chain.

Neighborhood effects and housing chains are just some of the ways that we as individual homeowners and purchasers are enmeshed in wider connections and ties. We need to remember this so that the debate can more effectively be about the details of stemming foreclosures and minimizing their neighborhood effects rather than on the principle of government intervention as an inherently bad thing. Underlying much of the criticism of economic policy is a mistaken assumption that we are economic isolates. We need to be aware of the social nature of even a capitalist economy, and more especially, of a functioning capitalist economy.