2.4 Understanding the Market
2.4.1 The Theory of Liberal Markets
The theory of ‘liberalism’ was coined by Adam Smith in 1776 via his seminal work titled ‘The Wealth of Nations’. Smith believed that important aspects of society should be determined by the market where all members of society are interactively involved in producing an outcome. He viewed the market as good, sacrosanct and the best platform to distribute land, housing and income. Smith is of the view that interactive market transactions legitimise the distribution of land, housing and income, and thus, he rejects the idea of social redistribution or any 'interference in the market' by the state.
His argument is often used to oppose any form of public intervention in the operations of the market on the basis that the distribution of ownership, pricing and exchange of land and housing commodities in a market should occur unfettered. Smith argues that the market produces the best ‘distributive outcome' and thus, land and housing transactions should only take place in a market which maximises
30 the gains of each transaction. Hence, he argues that any attempt to substitute the market with any form of social redistribution is wrong.
Smith contends that moral values should not guide transactions of goods in the market even in the context where an individual profits but by the loss and immiseration of others. In agreement with Smith, Mises claims that one person’s gain always implies another person’s loss especially in the case of enormous economic benefits accrued as the result of plunder and pillage in wartime. In their view, both the dispossessor and the dispossessed have equal rights and whoever needs any goods should seek for them in the market. Hence, in the specific context of South Africa where most landholding is a result of dispossession through colonial conquest, the views of Smith and Mises are used by supporters of the market to oppose the expropriation of urban land without compensation arguing that it ‘violates the liberty’ of war victors. Hence, supporters of the market reject any claims for moral justice that could justify the exchange of land outside the market.
Even though Smith assumes that there is equality among participants in a liberal society, he also agrees there is inequality of endowment. In other words, he agrees competition in the market is good even if it is on unequal terms. Hence, inequalities of landholding are ‘normal’ and eventually market forces would ensure supply meets demand. However, in the unique context of the land market, the forces of supply and demand demonstrate that they are unable to supply urban land at a price that those seeking land are willing to pay and those owning land are willing to sell (Kalima & Cloete, 2010; Baken, 2003; Kironde, 2000). This contradicts Smith’s view that the ULM is self-organising, highly dynamic and can supply land in quantities that equal the quantity of land demanded at the lowest possible prices. In reality, a plot of land is transferred to the highest bidder.
Smith assumes that the ULM is perfect and has identical suppliers and consumers, homogenous land parcels, buyers and sellers who attach identical values and utility to land, and buyers with complete knowledge of market conditions. In reality, the ULM is imperfect due to the distinctive nature of land as an economic good. Firstly, unlike other economic goods, the price of land is completely derived from the value of or the use of land (Baken, 2003). Secondly, land supply is fixed or completely inelastic as land cannot be created or destroyed (Doebele, 1978). Once a piece of land is built upon, it cannot easily be recovered without increasing financial and time costs to the development. Thirdly, unlike other movable goods, land is not exchangeable as each land parcel is unique and immobile and does not have a homogenous price (Baken, 2003). Prices are location-bound, primarily determined by the demand for land in certain areas, and only indirectly by the availability and demand for land in the entire city (Doebele, 1978; Darin-Drabkin, 1977). Fourthly, unlike other commodities whose quality depreciates over time, land cannot physically depreciate over time even though its acquired qualities,
31 such as services and location advantages, can change (Doebele, 1978). Fifthly, apart from being used for production and housing purposes, land is a vehicle for storing wealth. Hence, owners of land in certain desired places can withhold land from the market expecting that prices would increase with demand. As a result, the price mechanism loses its stabilising function as increasing land prices would reduce land supply as speculative landowners hold onto land anticipating super-normal profits from further price hikes. Sixthly, the construction industry is slow to respond to change in demand and buyers and sellers are different and have imperfect knowledge of market conditions and transactions as information is not easily accessible (Kironde, 2000). These market imperfections impair the efficient pricing and allocation of urban residential land.
The market imperfections alluded to above led to the subsequent modification of the ideas of Smith by Alexander Rüstow in 1938. Rüstow’s neo-liberal ideas advocate for the elimination of price controls, deregulation of financial, land and housing markets and reduction of the role of the state in favour of an increased role of the private-sector in land and housing delivery (Boas & Gans-Morse, 2009; Lofchie, 1997). From the 1970s, his ideas are used by supporters of the market to justify and unapologetically implement neo-liberal housing policies that ‘liberated’ the process of land delivery and housing development to become largely the responsibility of the private sector (Steger, 2010). As a result, the market has triumphed, became more far-reaching and has opened up and connected land, housing and financial markets worldwide (Chase-Dunn, 2010; Clark 1997). The market is also managing to influence a global convergence of politics, economic practices and culture around dominant market values.
Nevertheless, the liberalism theory as modified by Rüstow has shortfalls that are more evident in the South African context. One of the main shortcomings is that its dominant cultural values that have been imported through tenure systems, building standards and architecture are imposed over local tenure systems and traditions of settlement establishment without consideration of the local context.
As a result, local municipalities have given the market a carte blanche role in the delivery of urban land, housing and reticulated infrastructure services (Andersen, 2002; Andersen & van Kempen, 2001;
Sassen, 1991). This transformation shifts focus away from urban welfare-oriented issues as a consequence of inviting profit-seeking firms and rich individuals into politics (Andersen, 2002). The city is thus transforming according to the needs of the rich at the expense of low-income households.
The result is that in South Africa cities the allocation of land and housing resources becomes highly unequal. The city becomes physically segregated with the rich living in lavish mansions on huge estates while the poor are crammed in informal settlements; an observation that Sassen (1991) and
32 Mollenkopf and Castells (1991) document in the 'dual city thesis'14. Andersen (2002) makes a similar observation, noting that informal settlements are increasingly developing side-by-side or around affluent townships in many cities. By placing the interests of entrepreneurs above the social contract, liberalism fails to address the marginalisation of a large number of the urban poor from the market, which results in massive inequalities of landholding, housing and income in South African cities (Sassen, 1991). Even though Smith and Rüstow contend that the private-sector is more capable of delivering urban land and housing than the public-sector (Peterson et al, 1991), Jenkins (2001) is of the view that the market cannot deliver AURL in this millennium. Such criticism is expressed in the theory of market-failure discussed in section 2.3.2. Liberalism may be useful in justifying the operations of the ULM, but it cannot provide a framework that can aid the delivery of AURL at scale.
Thus, Stiglitz (2008) argues that the notion that the free market leads to efficient allocation of resources has no theoretical justification as the conditions under which that statement is true are not satisfied. The government may never alleviate the low-income housing crisis unless it actively confronts and resets the price-setting mechanism of the market to accommodate the urban poor.
Hence, this study tries to resolve the shortage of AURL through a mechanism that could price urban land based on the incomes of low-income households.