lördag 24 maj 2008

Ricardo's Law of Rent - every street busker knows it

Looking away, originally uploaded by nicasaurusrex.

Every street busker and Big Issue seller knows something about the economy that most politicians and their advisers do not. Location counts. Experts ignore this elementary fact. Karl Marx ignored it in most of his writings and so Marxist economies were run on the principle that location does not matter.

Assuming the busker is adequately competent and picks a good spot, the amount they will earn depends on where they set up their pitch. They will do well at busy stations like Oxford Circus and Victoria. They will do quite nicely at places such as Ladbroke Grove or Hammersmith. They will just about get by at somewhere like Highbury and Islington if they pick their time. It isn't worth bothering at quiet suburban stations like West Finchley.

These are exactly the sort of observations that led David Ricardo to formulate the Law of Rent at the beginning of the nineteenth century. The marginal location - somewhere like Highbury and Islington - sets the rent, since all earnings above the margin comprise the value of the location itself. People would be willing to pay quite a lot of rent at a location such as Victoria, so long as they were left with enough to make it worth their while to perform. In fact, if the rent is not collected in an official and orderly way, it opens the door to criminals who will do the job, as people will still be willing to pay. But nobody will pay rent to busk at a marginal location as then it leaves them with insufficient. In fact, any charge at at the marginal location will put the site out of use.

Modern tax systems ignore the advantages and disadvantages of location. And so those who work at marginal locations are taxed to the point where those locations are not places where anyone can work productively.

In this way, whole tracts of the country become non-viable as business locations. Of course there will always be marginal locations but Britain's system of taxation that ignores geography is a major reason why people drift to London and the South East in search of work, far more than would be the case if taxation took account of the Law of Rent.

And so street buskers and Big Issue sellers have an important lesson for those who are supposed to be making economic policies.

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