Jacob Rees-Mogg's Faulty Logic

On the BBC's Daily Politics, yesterday, in a discussion on housing, Tory MP, Jacob Rees-Mogg, put forward a number of arguments that were based on faulty logic.

Firstly, in a discussion on Stamp Duty, Rees-Mogg argued that the purpose of any tax was to raise money to cover the government's expenses, and so any tax, or variation in a tax, which resulted in less revenue being taken in, should be opposed. The reason for this argument was that, Rees-Mogg was opposing the introduction of higher rates of Stamp Duty on very expensive properties, over £2 million, which he argued would deter oligarchs from buying property in London, and thereby lead to lower levels of Stamp Duty.

But, the basis of taxation has never, in reality, been solely about raising revenue to cover government expenses. In 1800, India produced around 25% of the textiles sold in the global market. Within a couple of decades that had changed, and Britain dominated that market along with that for almost every other manufactured product. In the end, the reason for that was that British textile workers, backed by masses of the latest technology, were far more productive than the traditional Indian textile worker, based in a village. Even though, the British worker's wages were many, many times that of the Indian worker, the British worker was far more efficient, and produced a metre of cloth, more cheaply than the Indian worker, because of this higher level of productivity. Much less labour-time was contained in a metre of cloth produced by a British worker than an Indian worker.

But, this was not the whole story. Before getting to this stage, there was a lot of history. That history included, as Marx sets out, the destruction of the traditional Indian village community, which was the basis of its economy, and its production. As was the case in all previous agricultural communities, industrial production was undertaken, by agricultural producers, alongside their work on the land. Rip up the village community, and the ability for peasant producers to sustain themselves, and you rip up the ability of those peasant producers to also engage in their industrial production, in their cottages alongside it.

But, in addition, Britain also imposed high import taxes on Indian textiles, which prevented them entering the UK market, so easily, and thereby favoured the British textile producers. The United States, in the 1860's, itself industrialised behind high tariff walls, that kept out foreign manufactures, and helped US producers to accumulate capital, so as to reach a level, whereby they were competitive against those foreign produced commodities.

Moreover, prior to the victory of industrial capital over the landlords, the same was true, for example, of the Corn Laws, which protected the rents of British landowners, by keeping the price of corn artificially high.

In all these cases, the purpose of the tax was was not to raise revenue for the government, but as a policy tool to achieve some other economic effect. In which case, the determinant becomes not whether a tax, or a variation of a tax causes that revenue to rise or fall, but whether it has the desired economic consequence.

As Marx describes, in Capital, the capitalist class, as soon as the excess reserves of labour-power began to run out, and a normal working-day was established, became concerned that workers should consume productively, as well as work productively, so as to maximise the production and realisation of surplus value. As Marx describes, this took the form not just of discouraging some activities, and forms of consumption, but of encouraging others. So, in addition to encouraging the creation of Temperance Societies, and the work in that direction of organisations such as the Salvation Army – which can be seen in the film about US socialist Joe Hill – duties were placed on alcohol, to discourage drunkenness. For capital, consumption of excess alcohol by workers is unproductive and even destructive for several reasons. Firstly, the portion of wages spent on alcohol do not contribute to the reproduction of labour-power, and detract from the use of wages that could thereby be actually spent on wage goods. Secondly, excessive alcohol consumption actually depreciates the labour-power, by making the worker less able to work. The extension of this was the introduction of Prohibition in the US, and something similar can be seen in attempts to make the use of recreational drugs illegal.

But, capital also encourages the consumption of those commodities, which enhance the worker's labour. So, for example, Marx describes the way the extension of “free” Public Education leads to increasing layers of the working-class acquiring the skills required for an ever more technological capitalism, as well as providing an increased supply of those technical, administrative and managerial workers it requires, as the actual capitalist is removed from the production process, and their function is taken over by these workers, and whose wages are thereby significantly reduced, whilst the value produced or realised by their labour is continually increased.

The logical conclusion of this process is the creation of welfare states by capital, so that a portion of the wage takes the form of a “social wage”. The workers are given no say over this proportion, as it it is taken by legal force by the capitalist state, in the form of income tax, and national insurance, for the purpose of the provision of these commodities required for the efficient reproduction of labour-power.

Looked at from this perspective, the important question in relation to Stamp Duty on expensive properties is not whether any variation causes the tax take to rise or fall, but whether it has the required economic effect. In the case of these expensive properties, that comes down to the other effects that very expensive property creates. One of the arguments put forward by Rees-Mogg and other conservatives is that the oligarchs bring money with them, which they spend, buying other commodities, and so on. But, as I have set out previously, this is also a false argument.

It is not that these oligarchs simply bring a load of money with them, which they simply give away. They exchange that money for commodities, of an equal value, and so for whatever value they throw into circulation, they take out an equivalent amount of value in a different form from circulation, so that the result is zero. It would only have a net positive effect if the money was converted into money-capital, and used productively, but in the vast majority of cases, this is not the case. In fact, the use of their money for unproductive consumption, has much greater negative consequences.

Their purchase of property, is unproductive consumption, from this perspective because the property is not used as capital, but as conspicuous consumption. Moreover, part of the reason for this purchase of property is pure speculation, in the hope that its market price will rise. That is why so many of these purchases of expensive property, never see the property itself occupied either by the owner, or by a tenant. The money, and the commodities used in the production of this property, is effectively wasted, as it could have been used productively, either as means of production, or to meet the productive consumption of workers.

The consequence of this speculation, particularly, somewhere like London, is that it pushes up property prices, and consequently, as I've described elsewhere, land prices, which then increases the cost of house building. The consequence of that is that the value oflabour-power rises, because the cost of reproducing the worker's labour-power has gone up significantly. This can be seen again clearly in London, where the consequence of this astronomical rise in housing costs, has not only made house purchase impossible for large numbers, but where the cost of renting has risen so much as to cause an explosion in the bill for Housing Benefit.

In the short-term, this huge rise in the value of labour-power (which as I've set out elsewhere also arises due to the sharp rise in the cost of providing pensions, as the prices of bonds and shares has soared) is masked by the introduction of various measures, such as Housing Benefit, Tax Credits, and a huge expansion in credit, and so of private household debt. But, as Marx sets out, on average, wages are the phenomenal form of the value of labour-power. In the longer-term, therefore, these measures, which only temporarily disguise the real condition, will have the consequence of causing wages to rise, or else will lead to a writing off of that debt.

If the price of houses rises, either workers wages rise to cover that cost, or else they take on more debt, and pay more interest, over a longer period. But, then, in the end, the workers' wages must cover not just the higher cost of the house, but also this increased amount of interest. If, in the end, wages do not rise, it becomes impossible to sustain the debt, or the high property prices it has facilitated. In that case the debts go bad, and the property prices collapse. From the perspective of productive-capital, therefore, these high property prices, made worse by speculation by the very rich, over very expensive properties, are destructive, because they divert potential money-capital into such speculation, and away from productive investment, and because they push up the value of labour-power, which reduces the rate of surplus value, and consequently the rate of profit.

The same is true for the other speculative activity by the oligarchs that the Tories want to attract. The competition for existing bonds, shares and property, as Adair Turner recognised recently, does nothing to increase the amount of productive-capital, or to increase real wealth. It only pushes up the market prices of those assets, and acts to divert potential money-capital away from this productive activity, and instead into a search for short-term, speculative capital gain.

On the same programme, Labour's John Healey, argued that the Tories other housing policy for the sale of council houses, to fund a right to buy for Housing Association tenants was also short sighted. He pointed out that building additional council houses, rather, would not only create employment, and help reduce housing need, but would thereby act to reduce rents, and consequently Housing Benefit bills.

To this Rees-Mogg argued that the reduction in Housing Benefit was not the end of the story, because of the sunk cost for Council of building the houses. That represents the investment of capital, on which a return would be expected. But, this is nonsense, because he seems to have forgotten that the council would be more than recovering this sunk cost, and any average interest on it, as a result of receiving rents on those houses. Rees-Mogg's argument reflects the Tory long held myth, that council house tenants are somehow subsidised by the general taxpayer. That has never been true, and was highlighted wherever councils sold off housing stock to ALMO's, and Housing Associations. In fact, it was long the case that rents paid into the Housing Revenue Account covered a whole range of council expenses in addition to the cost of providing the shelter, which acted as a subsidy to the General Rate Fund!

Building more council houses, as part of a general expansion of housing supply, in so far as it acts to reduce rent levels, acts to reduce the amount that is paid out as Housing Benefit to cover those high rents. The Council incurs a capital cost to build the additional houses, a capital cost, upon, which an imputed return, equal to the average rate of interest should be added. However, the Council, then obtains rents from tenants on these houses, which it formerly would not have obtained. Moreover, where the capital cost of building the houses, may be sunk over say twenty-five years, the Council will continue to receive rents on those houses, for one hundred years or more.

Rees-Mogg's argument followed the logic that others have put forward over the last few years, that the answer to the housing crisis is to build more houses, but, as I have demonstrated several times, this argument is facile. It is based upon the idea that housing demand exceeds housing supply, and so the answer is to simply increase supply. It also confuses housing need with housing demand.

The reality is easily seen. If as Rees-Mogg and others claim, the problem is that demand exceeds supply, pushing up prices, why does not the market simply do its job, and lead to builders taking advantage of these extraordinarily high prices, so as to build many more houses, and so make greatly increased profits? After all, although the price of houses has risen 20 fold, or 2000% since 1980, the cost to builders of wages, and materials has not increased by anything like that amount, during that time. In fact, as with every other commodity, the significant rises in productivity, in that 35 year period, means that the actual cost of building a house has fallen in real terms during that time! So, these astronomically high prices, should mean astronomical levels of profit for builders, encouraging a bonanza of building, rather than the dearth of house building activity that has actually been seen.

The only answer that Rees-Mogg and others can come up with, is that this building bonanza is being held back only by the UK's archaic and sclerotic planning laws. That is nonsense. Firstly, that didn't stop much greater housebuilding in previous periods. Secondly, the planning framework, and even other restrictions such as NIMBYISM, might act to slow down the process, but it cannot ultimately be the cause of less supply, because that confuses stock and flow. In other words, if a changed planning framework causes the time to go from application to completion to rise from say 1 year, to 1.5 years, this can explain the number of completions falling, during the initial 12-18 month period, but if the number of applications continues at the previous rate, so will the number of completions at the end of this initial period of delay.

No, the reason that builders are not increasing supply, is that it is not profitable to do so. They can barely sell the houses they are currently adding to supply, because there is not excessive demand, but inadequate demand for additional houses, at current market prices. In order for housing demand to rise, to justify additional supply, current house prices must fall. But, from the builders perspective too, they would then only bring forward this additional supply, if their own costs fell, which means that development land prices must fall considerably from current levels.

The sequence must be, first to burst the property bubble, so that current property prices fall substantially, to a level where workers can again reasonably afford to buy or rent property from their wages; secondly, that this thereby causes a collapse in building land prices, which represent a considerable obstacle to building new houses at affordable prices, because they swallow up the builders' profit, even at today's astronomical house prices; thirdly, on the basis of these much reduced land prices, and a consequent willingness of land hoarders to dispose of it, before it devalues further, to build the new houses to buy and to rent, at reasonable prices that workers would then be able to afford, creating real rather than speculative demand.