Landlords and the Labor Theory of Value

Marxism is hotter and trendier, which has not been seen since the fall of the Soviet Union. Now, this ideology has a great cult following in the largely liberal-democratic West. It is rather interesting to see the difference between more orthodox admirers of the former Soviet Union, and the western, culturally Marxist people who have largely focused on passive activism and a cultural — rather than outright violent — revolution. This new generation of Marxists critique numerous aspects of society and the system in which we live in, just like any non-establishment sect. However, it seems that one of their most frequent focuses is that of rent and landlords, especially in the crisis that the COVID pandemic brought to our doorstep.

From my understanding, Marxist thoughts on landlords are summed up as follows: Landlords do not provide housing, construction workers and people involved in the construction of houses do. They take houses that could go to people who need them, and hold them hostage for rent.

At surface level, this sounds like a logical deduction of the housing system, which should enrage anyone, especially those who aren’t homeowners. However, one must use contextual thinking to break down how housing ought to work, and the flaws in this argument. Remember that construction workers are paid a salary. Does this mean that Marxists want these workers to be paid for the labor they gave AND in addition own the house? Or simply to opt out of the salary and own the house? Moreover, if they end up owning the property, can these workers find tenants to live in the property and charge them rent?

The Labor Theory of Value

Before delving into the LTV, I must point out that many of these Marxists seem to have a grossly exaggerated idea of how much money landlords make on their investments, and usually underestimate the costs to the landlord: property taxes, maintenance, insurance, landscaping, utilities, etc. Cap rates for the average landlord are usually unimpressive, even if they happen to beat inflation. You can see the exact rates for the past year here.

In 2019, the average profit margin in residential home development was 7.6%. How many construction workers would want to wait until the house is sold and ready to be lived in before their wages were given to them, plus their share of the profit?

Introducing the Labor Theory of Value, a favorite of the Marxists, socialists and anti-landlord radicals. In economics, a theory of value must first explain the exchange value of goods and services. In this particular theory of value, the long-run price of a good is determined by the total quantity of labor put into it. Similarly, the cost theory of value explains that the price is determined by a good’s cost of production.

I intend to write a more full-fledged critique of the LTV. But for now, here are some fatal flaws in its thinking:

1. It only applies to reproducible goods. The LTV can easily explain the market prices of reproducible goods. But what about non-reproducible goods? Say, a Picasso painting, or a guitar owned by Elvis? Clearly, a different theory is needed to cover anything on the market where the labor or cost of production have little to do with market prices.
2. Methodology. As stated above, any economic thinking of this sort must neglect the undeniably huge role of subjective valuations in markets and prices. Past expenditures and efforts are not nearly as important to the consumer in determining the merit of an exchange between good X and good Y.
3. Costs. If you think about it, costs are prices. That is why the CTV is, at best, a partial theory. Say it helped us deduce the price of a smartphone, for example, by accounting for the money costs of labor, lithium, glass and other resources that went into its production. These costs are market prices too, of capital goods and services. Thus, this theory does not construct a price mechanism from building blocks. Rather, it is a vague explanation of the relationships between prices in different stages of production (in the long-run).
4. Long-Run. The LTV and CTV fail to explain day-to-day irregularities that occur in market prices. It only seems to aim for long-run prices.

These are probably the most obvious critiques and relevant to this article. The Marginal Revolution of economics gave a more solid explanation of prices and exchange. Here, market prices are determined by the marginal utility of a good. Eugen Von Böhm-Bawerk, a leading figure in this intellectual movement, illustrated that money variations of marginal units in various commodities were enough to explain prices. It also accounts for the contributions of labor and costs!

Naturally then, one can see why Marxists consider rent, profits and interest “theft”. If the value of a good is solely determined by its costs, including labor, then anyone who is not a laborer in production is stealing. But what do landlords provide then? Three main contributions:

1. Managerial oversight: Landlords have many duties, which include hiring handymen, coordinating and financing improvements, coming up with planning, procedures, and policies and contacting agents. Of course, many landlords outsource these duties to other professionals.
2. Risk-taking: Virtually all investments carry risks. Building projects may go under due to a number of externalities. Construction workers may lose their jobs and stop earning wages. While unfortunate, a building project failure actually results in the loss of money and capital on the landlord. How many construction workers would take on a small share of a small profit if it carried a great risk of loss?
3. Time preference: The phenomenon explained above can be attributed to the concept of time preference. In the Subjective Theory of Value (STV), the laborer gets the value of everything they put in, due to the contrast between the value of the actual labor and that of the output — which will be sold in the future. Hence, most construction workers would rather receive a certain percentage of the construction’s value in the form of wages rather than to wait and risk uncertainty once the house is put up for sale or rent. If a group of construction workers want to assume the risk, more power to them I say!

In conclusion, landlords are just people who seek to earn passive income. Perhaps it doesn’t help that the term itself is antiquated and carries heavy connotations. Anyway, are these Marxists insisting that they should consume the income they “don’t need”? (or should they not even earn that “extra” income in the first place?) Obviously property rights also come into the question. Simply speaking, eliminating the landlord from the economy is just a massive leap toward socialism.

Granted, there are plenty of bad and neglectful landlords. There are also numerous bad tenants, who sometimes damage property and game the system professionally. But it is safe to assume landlord and tenants alike are just people helping each other. On several occasions, either party falls on hard times and is unable to afford rent, or repairs/maintenance.

There are people who are bad at their jobs everywhere, in every industry. Housing is no different. If overly restricted by a government, even with good intentions, the result will be a disastrous step away from investment, construction, renovations, etc. There is a need for managerial and entrepreneurial spirit in housing, which satisfies a demand for homes, risk mitigation, and the time preference of different parties involved.