rent, always rent

economics of the Zohranmarket

I have occasionally said in the past that training in Marxist economics tends to give you a) a weird, unrealistic and largely useless theory of economics plus b) a clear understanding of how economics relates to political power. While a training in mainstream neoclassical economics only gives you the first of these.

Which is more of a laugh line than a serious piece of analysis, but if I were to be forced to defend it, I would engage in all sorts of slippery rhetoric to change the subject to what I think is the defensible version of the claim – that because Marxian economics is basically 19^th century mainstream (the jibe that he was a “minor Ricardian” is not wholly off target), Marxists often have a better intuitition about real world problems, precisely because they start from the perspective that profits are mainly rents.

This is the key to understanding, for example, the question of why groceries cost so much in New York. I won’t link to them because I don’t want to start fights, but a lot of the commentary on this subject has attempted to bring Data to bear by looking at supermarket profit margins, and asking whether a state-owned retailer would be more or less efficient.

But that’s very much the wrong way to look at this sort of question. Supermarket profit margins will tend to be the same roughly everywhere, and will tend to a very low level. In exactly the same way, and for exactly the same reason, that 19^th century tenant farmers’ income was almost always at roughly the same subsistence level whatever the quality of the land, and despite huge productivity improvements in farming machinery.

That reason being that David Ricardo and his Law of Rent are not easily denied. Two essential inputs into the grocery retail trade are land and business permits. Almost everything else in the industry is a commodity with a price set in the free market, but these two aren’t, and they don’t have any close substitutes.

Which means that, in general, when you look at the recorded profit margins of a retailer in the accounts, what you are learning about is how good a job the real estate investment bankers did. And that when you’re comparing the (acknowledged to be anomalously high) prices of groceries in New York City to the (acknowledged to be more or less in line with the rest of the industry, and not showing obvious scope for fat to be trimmed) profit margins of New York supermarkets, what you are seeing is the amount that has been extracted by a sort of “permit Raj”.

It’s a sort of lobbyist’s conjuring trick – your eye is kept on the slim profits in the operating business, while the question of rent is allowed to slip away as just being an inescapable part of the cost of doing business. It also allows the people who gain from the current market structure to use their relatively much less privileged tenant business operators as a human shield, without any easy way to formulate the question of why someone who is selling the necessities of life at a 25% markup might find themselves struggling to make ends meet.

And this is the gap into which I think the “Zohranmarket” might fit. Which is to say – if the city owns the land, and internalises the zoning gain from giving permission to use the building for a supermarket, then it’s intrinsically working from a lower cost base. Questions of operational efficiency don’t really enter into it.

Obviously, one might say that it would be better to deregulate retail zoning and directly attack rents that way; if you changed the rules to allow a few Walmarts, they would probably have the same effect as a few Zohranmarkets. If you can do that without chuckling, there’s probably a good career in public relations for you. But for the rest of us, I think we can just give a shrug and an “in principle yeah but it would be nice to have something that might take less than twenty years to have any effect”.

A corollary of Ricardo’s Law is that when a set of rents are the result of public policy, the potential budget available to lobby to maintain that policy is the entire capitalised value of the rents minus an epsilon. And so, it’s a political economy issue – having the Zohranmarkets allows the political authority to calculate and titrate how much it’s going to attack these rents, and to calibrate that to the amount of political opposition it thinks it can handle.

Which is where I came in – the advantage of the Marxist analysis is that you understand that profit is a return on capital, and that a return on capital is an intrinsically political quantity. If you don’t fancy going all the way into Marxist economics, and god knows I understand why you might not, just remember that for nearly all questions of business analysis, “who owns the real estate?” is almost never a stupid question to ask, and that it’s often a huge time saver to understand early on in the project who is paying rent to who.