Surplus Extraction
pedestrianobservations.com
pedestrianobservations.com
> Normally, a competitive market has no surplus. The owner of a restaurant, the developer of a building in an unconstrained area like suburban Texas, the seller of cloth masks on Etsy, the freelance web developer – none of them is making a killing. People enter the market until profits are driven down to levels low enough to essentially be the owner-manager’s wage
That sounds like a description of abnormal profit, and not surplus, which iirc is the difference between the price of an object and what consumers would be willing to pay / what producers would be willing to produce at? He seems to get into discussing actual surplus further down in the article though.
1. Even under perfect competition, there is still a surplus. But it goes to the consumer. Example: a loaf of bread costs 1$ to produce, is sold for 1$ and delivers 3$ of value (economists call this value “utility”) to the consumer. In that case, the surplus was 2$ and fully went to the consumer.
2. The implied assumption is that perfect competition is “normal”. In reality, perfectly competitive markets are rare and there is a balance between firms constantly trying to find or create new market and competition entering the market. For example, Nike would insist that their sneakers are special and different from all the others. For the consumers that fall for these marketing tactics, Nike has no competition, because it is the only place where you can buy Nike sneakers. Same applies for most other products. It is quite rare to have a situation where two firms offer perfect substitutes. Therefore, perfect competition is not “normal”.
What is true is that in a perfectly competitive market, there is no deadweight loss.
The blog post, however, is wrong.
The community in which the author lives must exist in an alternate universe where the state is efficient and egalitarian. In the community where I live (NYC) the Mayor's incompetent wife has been appointed to run a billion-dollar agency. Central planning is neither useful nor efficient when the planners are stupid and corrupt.
To make use of David Friedman's observation about a similar remark, unfortunately this sentence remains true if you take out the last seven words.
Which makes the author's faith in central planning even more problematic.
For that reason, central planning works out passably for predictable problems with high capital requirements like sewerage, roads and electrical grids.
And those who collude become the central planners. So central planning doesn't fix this problem: it worsens it, because now the colluders have government power on their side.
I don't disagree with that statement, but reasonable people can debate and disagree in a hypothetical fantasy world where central planners are thoughtful and competent. This is why I find it more useful to address the situation in the actual world we live in, where stupid, incompetent and corrupt people like Chirlane McCray (wife of NYC Mayor Bill DeBlasio) are appointed to spend billions in taxpayer dollars to do the "planning".
Unfortunately with this issue, as with every other, most people are more interested in ideology than reality.
The majority of the surplus goes to the consumer, yes.
> Gratuitous tunneling instead of above-ground construction. This is usually a demand made of high-speed rail, but there are some gratuitous tunnels in suburban rail as well, for example Crossrail 2. The surplus here is that NIMBYs do not like to see trains from their houses; the emotional value of their views is naturally a fraction of that of the cost of tunneling.
I'm not sure how the author puts a value on someone else's preference for a view. This seems paternalistic. The view out the window of your home has a significant impact on your quality of life.
> Extortion of community benefits to activists, for example demands for larger stations to act as neighborhood centers. A large degree of the cost explosion of the Green Line Extension in Boston came from the policy of accommodating local demands, leading to oversize stations. But such overbuilding can also occur absent extortion – the surplus can vanish into poor practices, representing incompetence rather than malice, as in the oversize viaducts of California High-Speed Rail.
Uselessly oversize aqueducts are wasteful but there's a lot of value in building a new road around an existing useful building rather than using the power of the state to demolish someone's community center because it happens to be where you want to drive cars.
> Even more recent attempts to create equity have failed. Slowing down the state and empowering community is always bad for equity, because the community is where inegalitarian traditions live.
At least the author doesn't mince words.
> What it does say is that the role of the state is to safeguard surplus and keep it socialized, against demands from many special interests, which should be disempowered through legal changes making lawsuits harder and reducing the ability of consultants and unions to drive up costs.
Then agents of the state can capture surplus for themselves by autocratically dictating what is to be done and the people from whom the surplus is captured have little to no recourse.
> In that sense, the role of the planner is to say no – and moreover, to say no to charismatic groups representing much-romanticized people. No, dear mother with children, we will not build you a noise wall just because you think 140 km/h electric trains will reduce your quality of life.
If only politicians were this honest about their true motives. This is a refreshingly honest blog.
> No, dear tradesman much-profiled as a non-college white voter, we will not hire you for $110/hour when there exist people who will do your job better than you can at $35/hour.
This is actually why markets are better than central planning.
> No, dear third-generation business owner, we will not listen to what you think about traffic as we replace parking spots with bus lanes.
This is why cities are dying.
> No, dear white flight homeowner, we will not build you a tunnel just to avoid taking a few houses through eminent domain.
What makes someone so callous about using the power of the state to expropriate people from their homes?
> No, dear deindustrialized city leader, we will not require companies to set up factories in your city at high cost when we can get cheaper imports.
Which is why people buy plastic crap made by slaves in Asia and toss it in the landfill.
> It’s never going to be no, dear criminal, or no, dear Nazi, because criminals and Nazis are not used to making such requests and having people listen.
Which is why the criminals and Nazis get jobs as urban planners if they want to, say, evict homeowners and put noisy trains next to daycare centers.
Good article, I wish more people were as forthright about their beliefs and values.
One last thought:
> the role of the state is to safeguard surplus and keep it socialized
> Slowing down the state and empowering community is always bad for equity, because the community is where inegalitarian traditions live.
Community centers enjoying surplus is socialization of the surplus. When the state extracts surplus from a community its more likely to spend it on noisy trains and oversize aqueducts than distribute it to other needy communities.
Which is different from what the author says--and at least it is usually correct, whereas what the author says is simply wrong. It is not true that in a competitive market there is no surplus.
What is true is that in a competitive market, price gets driven down to marginal cost, and there is usually no opportunity for the seller to practice price discrimination, so everyone pays the same price for the product--not just the marginal buyer, for whom the product is just worth what it costs, but also all the non-marginal buyers, for whom the product is worth more than what it costs (in the sense that they would still buy the product even if the price were higher). The extra worth of the product to all of those non-marginal buyers is the surplus, and without price discrimination, the seller has no way of capturing any of it, so there is little or no margin for the seller.
> I'm not sure how the author puts a value on someone else's preference for a view.
He's assuming that those people would be willing to pay some amount to have the tunneling done and thereby avoid having to see rails. That amount, that they would be willing to pay but which the owner of the rail has no way of capturing from them, is the surplus. Here the author is using the concept of "surplus" correctly; unfortunately, in many other places in the article he doesn't. He also, as you point out, has a misguided fondness for central planning.
> What makes someone so callous about using the power of the state to expropriate people from their homes?
First: "Expropriate" is both emotionally loaded and inaccurate. It looks like you're trying to be manipulative here rather than present a sound argument.
Second: If we're going to build a road or a rail line, we're either going to spend some money and buy peoples' homes, or we're going to spend more money and create a tunnel. But money doesn't grow on trees for local governments; if they spend it, they have to take it. So either we're going to take money from people to buy houses from people, or we're going to take more money from people to create a tunnel. Why should they take more money from people to save peoples' houses? Why should my taxes go up to save your house?
Note that this is a completely separate discussion from whether eminent domain actually pays people market prices for their homes.
Simple: because it is my house, not yours. Why should I lose my house so you can drive your car on a new road when there are other alternatives?
Wrong. Expropriate is a technical term for taking property from someone, usually by the state for public use. The emotion you're referring to is all associated with the act itself. You've also failed to identify an inaccuracy.
> It looks like you're trying to be manipulative here rather than present a sound argument.
All I did was ask a question.
> Why should they take more money from people to save peoples' houses? Why should my taxes go up to save your house?
Your taxes are going up because the government has decided to build a road or rail line. Why should the cost of that be artificially low because the government is able to expropriate people's homes?
> Note that this is a completely separate discussion from whether eminent domain actually pays people market prices for their homes.
By definition, it does not. This is why your statement:
> we're either going to spend some money and buy peoples' homes,
elides the relevant factor: people are being <strike>expropriated</strike> deprived of their homes through threat of violence in order to lower the cost of infrastructure.
> we're going to spend more money and create a tunnel. But money doesn't grow on trees for local governments; if they spend it, they have to take it.
Perhaps the government needs to exercise fiscal discipline. Perhaps the government can't afford a new rail.
Mea culpa, though: Until I looked at dictionary.com, I didn't know it could be used for eminent domain.
> All I did was ask a question.
"How can someone be so callous?" That's a question, but it's not just a question. It's pushing a viewpoint.
> > Note that this is a completely separate discussion from whether eminent domain actually pays people market prices for their homes.
> By definition, it does not.
By definition? I call BS. In fact, the Constitution requires "just compensation". Now, have governments abused that, and actually offered less than just compensation? Of course. But "by definition"? No.
> elides the relevant factor: people are being <strike>expropriated</strike> deprived of their homes through threat of violence in order to lower the cost of infrastructure.
Nice whine. But in fact the government does have the right to do that, and for quite good reasons.
And, if they make the tunnel, they're going to have to take different peoples' houses.
> Perhaps the government needs to exercise fiscal discipline. Perhaps the government can't afford a new rail.
On that point, I agree with you at least some of the time.
Yeah, it just means 'taking property.' It doesn't reference compensation.
> "How can someone be so callous?" That's a question, but it's not just a question. It's pushing a viewpoint.
Well it does imply that the person referenced is being callous towards the concerns of the property owners, which is why I asked the question. I'm not sure what viewpoint you think I'm pushing. I'm wondering how someone can be so dismissive of the concerns of a homeowner regarding the government depriving them of their home in a place they chose to live. They picked that house and that place for a variety of reasons then invested their time, their life, their families, and their money in that community. Then some bureaucrat says "we need this for <aquaducts>, get out or die. Here's a check." Its one thing to exercise your best judgment and believe that when the public interest is balanced against the private interest, this is the greater good. But when someone callously disregards the interest of the homeowner in the home and community they have chosen to be part of, it raises serious questions about whether their interests are actually being balanced fairly. When someone is casually dismissive of a person's interest in continuing to own the home that they chose to buy and live in, one wonders if they are even considering the homeowner as a person and not an obstacle.
> By definition? I call BS.
Yes, by definition market value is the amount that must be paid to achieve a voluntary transaction on the market. Eminent domain forces a person out under threat of violence and pays an amount that the forcing party deems to be acceptable. If they were offering fair market value, by definition, they wouldn't have to threaten violence.
> In fact, the Constitution requires "just compensation".
I'm confident you understand that the constitution is a document and does not compel obedience to its words. Furthermore "just compensation" implies the question "just according to whom?" Its not a synonym for "market value."
> Nice whine.
So when I used a technical term correctly, you whined. Now I break it down into it technical components in a purely descriptive sense, so I'm not expecting you to know the meanings of technical terms, and you say I'm whining. What am I to make of this?
> But in fact the government does have the right to do that, and for quite good reasons.
Referring back to the question that started this discussion, when people are so callous about the manner in which government exercises its powers, it calls into questions whether those reasons are in fact very good.
Minor quibble: governments have powers, people have rights.
> And, if they make the tunnel, they're going to have to take different peoples' houses.
Asserts facts not in evidence. The point of the tunnel is to go underneath extant structures.
> On that point, I agree with you at least some of the time.
glad to see I'm making my point.
Infrastructure works such as roads and railroads require a continuous right of way to be able to function. Anyone constructing such a work is compelled to purchase all of the land necessary for that work; if they fail to obtain just one parcel, then the value of the result is often worthless. Not only is the seller compelled to sell the parcel, but the buyer is also compelled to buy it.
Fair market value is the price that the parcel would have been bought for if the buyer were not compelled to buy it at almost any price, and it can generally be imputed by looking at the history of real estate transactions for similar parcels. It's a pretty usual practice, since it's relevant for pricing real estate, insurance claims and estimates, and even property taxes.
You're using two different sense of the word "compelled" here which creates a logical fallacy called "equivocation." The buyer is not compelled to purchase all the land by men with guns who will force them to take possession of the land. They are "compelled" in the sense that their preferred outcome relies on obtaining all the land that they want, which is very different and makes the value of the parcels they have obtained dependent on the acquisition of the remaining parcels. This is not at all the same as men with guns coercing someone to do something.
Really I'd have more confidence in such schemes if people weren't habitually eliding the plain facts of the situation with euphemisms and equivocations. If you think large infrastructure projects require depriving people of their property with violence and the greater good of society requires large infrastructure projects, just own up to it. its just violence and threats, its part of life. What do you think happens if you don't pay your taxes or don't pull over for the flashing blue lights?
> Fair market value is the price that the parcel would have been bought for if the buyer were not compelled to buy it at almost any price, and it can generally be imputed by looking at the history of real estate transactions for similar parcels. It's a pretty usual practice, since it's relevant for pricing real estate, insurance claims and estimates, and even property taxes.
Thats how people arrive at "just compensation" in order to meet constitutional scrutiny, that's not what "market value" means. The inconvenient fact that when bureaucrats decide they want something they can get the police to take it away and write a check is just a fact of life. If its so bad that we need to pretend its not the case, then maybe we shouldn't do it. If its not that bad but people get upset, then we need to toughen up and stop pretending otherwise so people can come to terms with the world we live in today.
> The point of the tunnel is to go underneath extant structures.
Tunnels still have entrances. It may be fewer houses, but it's still going to take them.
> > On that point, I agree with you at least some of the time.
> glad to see I'm making my point.
I'm not agreeing with you on the main point you're arguing, but if it makes you glad...
The callousness with which the homeowner's interests are dismissed does suggest this, yes.
> To use your own words: Asserts facts not in evidence.
I haven't asserted it as a fact, I've questioned whether their interests were balanced because of the contempt for those interests that was demonstrated in the article.
> It's your assumption and your bias. And you're wording your question to assume that bias.
I'm specifically addressing this as the thing that I posted about. There's nothing biased about responding to a callous statement by observing that it dismisses someone's perspective callously.
> Tunnels still have entrances. It may be fewer houses, but it's still going to take them.
The entrance can be constructed on public land or on land that was purchased on the market. There's nothing about tunnels that require expropriation. The same cannot be said about large above-ground structures in occupied areas when people don't want to sell.
Not necessarily.
It is certainly true that the government has the power to do it. But the point of having a free country with the rule of law is supposed to be that might does not make right. The fact that the government can take your house if it decides it wants to does not, in itself, mean it has the right to.
Any such right ultimately depends on the government being responsible to the people and the people accepting that the government is acting in their interest and that what it does is for the overall good of society. The larger and more bureaucratic the government becomes, and the more it uses its power based on utopian visions of people who do not suffer the consequences if they are wrong, the harder it is for the people to accept that the government is acting in their interest and that what it is doing is for the overall good of society.
And if the property is taken for public use. Not all takings that have been claimed to be justified under the eminent domain power have been for public use by any reasonable interpretation of that term.
Perhaps the government needs to exercise fiscal discipline. Perhaps the government can't afford a new rail.
What does 'afford' mean to you in this context? The money is always (well, almost always) going to come from taxes, a municipality or other local government can reduce services and infrastructure spending (opex and capex, roughly) and lower taxes, or increase services and infra spending and raise taxes.
> What does 'afford' mean to you in this context?
There's a budget that balances income and expenditures. The government can't afford things if the expenditures are more than the income, roughly speaking.
> The money is always (well, almost always) going to come from taxes, a municipality or other local government can reduce services and infrastructure spending (opex and capex, roughly) and lower taxes, or increase services and infra spending and raise taxes.
In this context (eminent domain seizures), they can also decide they want to put some infrastructure somewhere that is already in use, and instead of purchasing that real estate, they can use their power of eminent domain and expropriate the land from the people who had owned it. That costs less than purchasing it on the market because they compel obedience via threat of physical force.
> There's a budget that balances income and expenditures. The government can't afford things if the expenditures are more than the income, roughly speaking.
Okay, so how does raising taxes to pay for something not count as 'affording' it?
This is a bit of a digression because this began about eminent domain but I'll bite. Because taxes are coercive. The idea is that deciding that you need more money because you want something and don't have enough money for it, then telling people more is required of them because you want something you didn't want last year is prone to abuse and fails in the limit. Why don't we just raise taxes enough so that we could all retire?
Money is a proxy for valuable goods and services. Raising taxes to pay for something is increasing the proportion of physical goods and services consumed by government. We can debate about what the proper proportion is but everyone should agree that there is a point where the government is consuming the maximum amount for the good of society and a further increase would be bad for society. At that point, we could agree that the government can not afford additional expenditures.
A logical response is that certain expenditures increase the wealth of society and so the tax rate might increase, but there would be more goods and services available so society could afford to pay more taxes. This is potentially true but doesn't apply to every public work, so we could still agree that there is a point where government can't afford any more. Whether a given public work would in fact increase the wealth of society is a matter of discussion for members of that society.
No. Cities are far from dying, at least in the vast majority of the countries I've been to. There are bike lanes, lower crime rates, better parks and waterfront areas. They feel alive inasmuch as the suburbs feel dead.
There is one, major problem with cities right now and that is property prices have climbed beyond the levels that are affordable for the working class. The reason that has happened is that interest rates have been kept low for decades and the state usually backstops either banks, or mortgages up to a certain amount, or both; so the risk of loss is lower. To solve this issue we need higher property taxes, especially on land value and street frontage of non-heritage buildings and to make up the difference, lower income taxes or a basic income. I also think we need specialized taxes on foreign national owned or occupied homes to prevent every city from becoming a digital nomad hub, while pushing out the locals. I like being a digital nomad, but I hate what we're collectively doing to middle income countries.
https://furmancenter.org/research/publication/supply-skeptic....
Take Ottawa, for example. One side of the river is in a tax region where property is taxed moderately, the other is in a tax region with very little property taxes. The difference in price is 5x of an annual income for a home vs 12x for a home. And yes, some of this is due to language requirements for schooling, but it's only a small part of the overall difference. These are two regions with the same interest rate for housing when evaluating regions with varying interest rates and property taxes the differences are even more stark.
Lastly, it's much, much easier to build more housing when the cost of land isn't so inflated. The system of forces involved here are cyclically causal, they are not a directed acyclical graph.
The author is a bit facetious. It's not the emotional value of the view, it's the market value of their real estate. If you have a house worth $1 MM with no above ground subway in front of it, and then one day they build such a subway and the market value goes to $800 k, then you just lost $200k. It hurts your pocket, but it sounds better to say it's your emotions you really care about.
But that article reads like a 14 year olds' clickbait troll polemic on urban planning and economics. It's low quality content and shouldn't be on the front page.
This problem happens all over the world. Construction is becoming more complicated per se. Buildings of the 1950s were much simpler to build. A modern "smart" building where doors have their IP addresses is basically an industrial-sized robot with a lot of moving parts.