I’ve been using a parable to respond to some of the more off base views of housing economics I run into, especially the oft repeated syllogism, “increasing housing supply won’t lower prices because more housing attracts people who earn lots of money; so developers will just build more housing for the rich.” Oddly, these people do agree that more jobs create increased demand for housing that increases prices. Fewer jobs that pay less, they argue, might ease the rise of housing prices. But build more housing? No way! Maybe supply and demand works for Pepsi, but not housing.

There are various versions of this, including one that I have already written about.  Here’s one Facebook comment about the first article I linked:

The article says everything I have to say. It’s driven by demand, not supply. Upzoning and building more high-end units will never create more units affordable to those making substantially less than median wages.

The argument is strange, bordering on Lysenkoism, the views of Soviet biologist who claimed, wrongly, that traits acquired by an organism are passed on to offspring. This view of evolution was hospitable to Marxist views that the Paradise of the Proletariat could be made by enforcing changes on people’s wants and behaviors. People could be trained out of their capitalist greed. But Lysenko’s views were terrible science, and people that disagreed were sent to the gulag.

The tortured economics of supply deniers follows a similar pattern. They accept the “demand” part of supply and demand but argue against the supply side. So here’s an extended version of the parable about the notion that builders build housing for the rich. I call it Newton’s Apple Stand.

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In the town of Woolsthorpe there was a man named Newton who heard there were lots of people interested in buying apples, but only a few people selling them.

He had and idea. He had an old friend, Faccio, who had an orchard. He contacted him and talked about how much he would charge to sell him apples. He calculated the labor and transportation costs of transporting the apples to a market stall, which would have to rent at a cost. Once he had all these numbers, he did the math, and he figured out what he needed to earn to quit his day job and still pay all his own bills and put a little savings away for his astronomy hobby.

Now he went to the bank and worked out a decent loan for his new business. The interest rate was good, but he had to put his house and a big chuck of his savings down as collateral. He thought about it for a long time, and even though it was a risky proposition, decided to do it. Newton’s Apple Stand would be a reality.

Across town and City Hall, some City Councilmembers wrapped up the third in a long series of meetings about apple prices. People had come by the dozens to complain about “skyrocketing apple prices.” One man said he couldn’t even find an apple—the town was running so low on apples there were waiting lists.

“We’ve got to do something about this,” said Councilmember Hooke.

“Yes, but what?” asked another Councilmember.

“We’ve got to make some rules about apples,” Hooke replied, “and I have a plan.”

Meanwhile Newton got working. His initial asking price for his apples was $1 per unit. That price was based on being able to get the apple off the tree, transported to market, cover his other costs including the interests on his loan, and still pay himself a salary—slightly less than what he earned at his desk job. Because he was new to the business and starting small, his price was a little lower than Gottfried’s Apple Stand down the street.

Things were going pretty well. People lined up to buy Newton’s apples.

“We’re so glad you’re here,” one man said. “And your price is pretty good considering how expensive apples are.”

The man paused.

“Have you heard about Councilmember Hooke’s idea to make prices even lower?” the man asked.

Newton felt a little pang of worry.

“An idea to lower my prices?” Newton wondered out loud.

“Yes,” said the customer. “Has something to do with charging a tax for every apple and setting limits on how many you can sell.”

Newton felt a little weak and sat down. He’d heard about Councilmember Hooke and his schemes. Like the time he tried to lower milk prices.

Sure enough when the paperboy dropped off the evening edition of the paper, and there it was.

COUNCILMEMBER HOOKE PROPOSES APPLE TAX AND LIMITS

The smaller headline underneath said, “new measure to lower prices, pay for more apples.”

In a matter of weeks the inspector from the Department of Planting and Development shared the new rules. Newton could only sell 100 apples a day and for each apple he brought to the market, he’d have to pay a 10 cent tax which would go to buy apples and sell them to people who had less money to spend on apples.

Soon, as the new rules kicked in, Newton realized he was in trouble. To sell his apples and still make his loan payments and pay himself he’d have to raise the price of his apples. After all, he could only sell 100, fewer than he had estimated when he wrote his business plan; and then there was the tax. And there was much more demand for his apples than just 100 a day.

By the end of the first week of the new limits and the tax Newton had no choice to raise the prices of his apples to $1.25 to pay the tax. The problem was that he was selling out too quickly. His customers were getting frustrated. Newton tried various things to make his apple supply hold out. He had deals on the first apple if a person agreed to buy three more apples later at the full price. It worked, but soon people were offering to pre-buy apples at as much as $1.50. Newton kept resetting his prices to keep up, but he kept running out of apples with the new rules, and that kept pushing people to offer more for apples. With prices rising so fast, it’s better to buy today. Who knows how much apples will cost tomorrow? Some people were even selling illegal apples, or sharing apples to get around the rules.

Then lots of young kids from the new company Microsauce started dropping buy. They were young, and had an eye for apples. The kids from Microsauce were willing to spend as much $2.00 for a shiny apple. Hal was stunned. He created deals to pre-sell apples to the kids from Microsauce and try and keep some of his other apples priced lower. But he kept running out of apples to sell.

The good news was that Newton was managing to keep his business going, but he worried that prices would get too high. Lots of his old customers couldn’t afford to buy apples anymore – they’d stop by and talk to Newton, but they couldn’t afford to buy anything. And the bank was getting nervous too. They kept asking for a meeting. Newton worried that they might want all their money back now.

When Councilmember Hooke heard about the rising prices he directed the Director of the Department of Planting and Development to reduce the limits on apple sales to 75 and raise the tax to 20 cents. During the first months of the apple tax the City had raised lots of money – but they couldn’t find any apples to buy to sell at lowered prices to people with less money.

“Why aren’t we finding any apples out there?” Hooke demanded.

“There aren’t enough,” an official told him. “Most apples get bought before they even leave the farm. In fact, some people are buying apples at one price and figuring out how to sell them for even more. We have poor people that haven’t eaten an apple in months.”

“Who is buying all these apples?” wondered Councilmember Hooke as he pounded the table.

“Sir, it’s those rich kids from Microsauce,” the official said. “They have so much money they keep biding up the prices. They just make too much money, and it’s making prices go up!”

“And the people selling apples are making a killing!” said another. “They’re laughing all the way to the bank.”

Another bookish staffer made another suggestion.

“Perhaps we should increase the supply of apples,” he said.

They all guffawed. “You must be a shill for the apple sellers,” they said.

“Everyone knows that the more apples we allow to be sold, the more the apple sellers will charge so they can make more profit!” said another. “It’s obvious. Letting them sell more apples will just increase prices.”

“Enough!” thundered Councilmember Hooke. “Get the car. We’re going downtown to talk to these greedy apple sellers.”

The motorcade raced out of City Hall and the first apple stand the Councilmember saw was Newton’s.

Newton was already long sold out of apples. And a banker was visiting him.

“We want out,” said the banker. “This whole apple thing is making us nervous. It’s too risky now. We want to collect our loan now, in full. You’ve already pre-sold a month’s worth of apples. This can’t last forever. It’s time to back off.”

One of the other bankers smiled knowingly.

“All the smart money is investing in gold!”

Newton was in a panic now. He could sell even fewer apples now and had to pay more in taxes for each. Not only that, even though the kids from Microsauce could pay, he wasn’t sure he could meet their demand for apples at the new limit of 75 apples a day—no matter how much they paid. Now the bank wanted their money back. If he scratched everything together, he could pay the bank off. But he’d be right back where he started at the beginning.

The bankers passed Councilmember Hooke on the way out. He slapped their backs and thanked them for the bonds that were being used to build the bridge across town. They all laughed. As they were shaking hands, an old lady walked up looking sad.

“I haven’t even seen an apple in a month, much less be able to afford one,” she said.

“We’re working on that!” said Councilmember Hooke. “We’ve got new rules in place. We’re reducing how many apples the apple sellers can sell and charging them a tax on each apple. Don’t you worry! We’ll get you an apple soon enough.”

The Councilmember and his staff now turned to Newton.

“Did you see that lady?” Councilmember Hooke asked Newton. “She and I want to know, why is it that you only sell apples to the rich?” 

Image of Sir Isaac Newton’s apple tree from Wikipedia Commons.