Rent is Always Exploitation
We shouldn’t be paying off our landlord’s mortgage if the they get to keep the house.
(This is the first of a series of essays regarding the modern housing market — why it’s exploitative, why it’s unaffordable, and why those aren’t exactly the same thing)
The rise of capitalist economics in the 18th and 19th centuries came alongside a paradoxical denunciation of landlords and rentiers, the archetypical “non-capitalist” exploiters. Adam Smith, considered by many to be the “father of modern economics,” had a particular disdain for them, even exceeding Karl Marx (who was of course more interested in expressing disdain for those Smith would call “productive” capitalists). To hear him tell it:
“As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for [the Earth’s] natural produce.” — Adam Smith, The Wealth of Nations, Book 1, Ch. 6
This accompanies many similar sentiments from contemporaries (John Stuart Mill, David Ricardo, and Marx) decrying the “unproductive” activity of landlords as an absolutely illegitimate form of profit, and one which provides no benefit to society. Modern economists dilute this righteous outrage by highlighting a particularly “bad” version, which they refer to as “rent-seeking.” Rent seeking, which (apparently) has nothing to do with rent in the usual sense of landlord-tenant relationships, is when a company or bad actor attempts to use explicit coercion, bribery, or monopoly power to charge more than they should otherwise be able to. The feudal lords in the sights of the early economists certainly did this — the economists claim they did not add value to their peasants’ lives at all, only extracting value from them, and only based on the favor of a monarch who might be long dead. But the modern residential landlord advances a truly bold claim: their charging rents is not rent-seeking behavior, because they do in fact add value and provide a service. In this essay we will try to evaluate this claim, and (spoiler alert) will find it wanting. But we will also find that the landlord and his co-conspirator, the bank, are not the last word on housing affordability; a nonprofit rental housing provider will also be unable to provide affordable housing if they have to compete with the existing capitalist market, even if they do not end up exploiting their tenants. To make housing not just non-exploitative but also affordable, we will need to go further and analyze the (origins of the) value of land. That will take place in a future essay.
The services a landlord claims to provide boil down to the following three:
- Landlords are responsible for performing maintenance, security, and administration (filling vacancies and resolving conflicts for tenants).
- Land and housing cost money, and they need to be paid for. Rent pays off the costs of construction or purchase.
- The landlord “assumes risk” by investing their money in residential housing.
These three services are necessary, they say, for rental housing to exist at all. You should already be incredulous at the start, however, when you notice that 2 and 3 directly contradict one another. If we are paying for the buildings, the landlord has risked nothing; if instead the landlord is being compensated for their investment, we shouldn’t have to also pay off that investment. Something very suspicious is going on here — even though it is sensible to imagine we should be “paying for” our housing, the modern immiseration of renters in service to that payment exceeds the bounds of credibility.
A Defense of Rentals
We will start with an unexpected admission: renting, conceptually, is a good thing. Any commodity which is used irregularly, or for a short period of time by any one person (relative to its lifespan), doesn’t need to be permanently “owned” by a single user. The renting of power tools allows an entire community to perform construction projects without each person needing to pay for the entire value of the tools only to have them sit, idle, in their house, for generations or until they decayed into unusability. Before digital advancements made this obsolete, rental movies and video games were a maximally efficient form of file sharing and development, as after a single viewing, the movie’s use-value for the original user becomes fairly low, but its use-value for the next person remains still just as high as before. Renting also allows expertise to be concentrated — even if I am a kayak enjoyer, in a rental scheme, I am under no obligation to learn how to repair or store a kayak. I can just enjoy it at my leisure, and then return it to the owner to perform those tasks efficiently and without assuming the responsibility for replacing it myself, if it were to break down through normal wear and tear. All these advantages exist in housing, especially if I will only live in an area temporarily or simply am not interested in learning how to maintain a house.
The abolition of renting of commodities in general would be a terrible disservice to human society, unless it were replaced by the logical extreme of universal public services, with the quintessential example being the public library. Do we even need to go that far, and make all rentals free? The library principle of public “borrowing” (funded collectively by taxpayers) and the membership club’s private “renting” (funded collectively by users of that commodity) are very similar, and might both exist even post-capitalism in different spheres. Certainly, we can imagine that some commodities are both inessential and expensive (say, 4-wheeler ATVs) and can be funded by those who enjoy them, rather than by taxpayers as a whole.
While renting is an admirable and good thing, this does not mean a rental‘s value is “whatever we’ll pay for it.” The value of rentals is derived from the value of commodities in general. We have discussed before the value of labor, which in general is around $78 per hour; thus the ethical price of a commodity is the price of the tools and materials used by the worker, plus ~$78 for each hour of work it takes to turn those into the finished product. If a buyer pays more than that, the seller is exploiting the buyer (by making money in excess of the value they added), and if they pay less, the buyer is exploiting the seller (by paying less than they received in value). In a free, competitive market of buyers and sellers, prices will converge to these values, and when they do not it indicates an unequal societal power possessed by the exploiter in that sphere. (To summarize Capital in a sentence: in the market, commodities can be sold at their value, yet sellers still profit, if the producers pay their workers less than they receive from them in added value). This is thus our starting point. But with a rental, the commodity is never fully “yours,” and you should not even pay this full value. What should you pay?
The Paradox of Renting
While we do argue that compared to individually buying every commodity a person needs, renting commodities for their temporary use is more efficient and cheaper for consumers and for society, that does not mean rentals are exempt from the labor theory of value. The only ethical rent to pay for the temporary use of a commodity is that of the labor performed by the owner/lessor in maintenance, administration, and storage (the new value being added), plus the fraction of the commodity’s value exhausted through your use. In other words, after you use the commodity, its value depreciates just a little bit, which you pay for, in addition to paying for the materials and labor used by the owner to get that commodity to you in working order. In an equation:
Here R is the rent paid, which is equal to the sum of three terms:
- The replacement term: vₚ is the property’s value, Tᵣ is the rental period for the commodity, and Tₗ is the lifetime of the commodity (so their ratio is the fraction of the commodity’s lifetime that it is in your use). This term represents the decay of the commodity through the renter’s use. At the end of the commodity’s life, this term alone should replace the value of the commodity vₚ. For example, if renters lease a car for 1 year at a time, where a car costs $20,000 and lasts 20 years, each renter should pay 1/20th of its value, or $1,000. The owner thus does not lose money on the commodity stock over time.
- The maintenance term: vₘ is the overall maintenance cost of the commodity, including any materials the owner needs to buy and any labor they either add themselves or pay an expert to add. If the user bought their commodity rather than rented it, they would need to pay this themselves to get the most life out of their commodity. As a renter, having this cost borne by the owner is more efficient and effective. But, the owner should obviously be compensated for it.
- The administrative term: Lₐ is the cost of the special activity of renting: administration. This includes filling vacancies, advertising, etc. This is the only “new” value being added which is substantially different from a world with no rentals. The reason renting is economically “good” is that the cost added through this term is offset by the efficiency gained in the previous terms, when compared to everyone owning full-priced, individual commodities.
As rentals decay, only the first term is needed to accumulate their value back to the commodity-owner, so that by the time they are completely unusable, on average, the owner has collected their whole value. They had to advance their capital to buy the commodity, and all that happened through their leasing activity is that they had their advance returned back to them in the form of money, plus their labor and maintenance compensated. When the commodity is exhausted, they may restore their stock at the end by buying new rental commodities, and thus they turn their capital from money back into commodities again. This means one generation of commodities, the one the owner started with before they began renting out their stock, goes unpaid-for. This is (assumed to be) their initial capital. While the rental business might be profitable, in the traditional Marxist story, it would be because the business is paying their workers less than they add in value in maintenance and administration. The consumer would not be exploited in this transaction, only the worker.
Even sold at their value, rented commodities having different labor-values and with different modes of service can have costs distributed unequally into these three terms. For commodities that are in principle worth owning, but which are simply not convenient to transport, store, or are expensive to purchase, like car rentals, maintenance would be the dominant term of this equation. For rentals which mostly serve to integrate the delivery of other services, like for example a hotel room, administrative and “luxury” services would be the dominant term over “room replacement.” If the commodities simply lose value quickly, or their “value” is highly subjective (i.e. rental movies), then the dominant component of the rental price would be continually replacing the stock with the next generation. None of these services are fully immune to the temptation to exploit the consumer by charging a rent greater than the sum of these three components, but assuming there is sufficient competition between providers (or substitutes), they will not be able to get away with it, as consumers simply go elsewhere.
The most important form of rent in the modern day, however, is housing. How should housing rents be proportioned into these terms? The incredibly high value of housing suggests that the important term will be the property value replacement term, but the longevity of housing is even more impressive than its cost. Housing is so eminently (and more or less permanently) maintainable that there is in fact no point at which it becomes “exhausted” unless you negligently run it into the ground, or there is a horrible accident, like a fire, earthquake, etc. Housing can and regularly does last 200 years or more.¹ Thus, the primary component of the cost of rental housing ought to be the maintenance term, which dwarfs both administration (depending on the size of the complex, this might consist of just filling vacancies and collecting rent checks) and slowly paying for the eventual replacement.
The paradox of renting is that the “replacement term” for rental housing, unlike other rental commodities, does not pay back the initial capital while it decays, but instead pays it back in spite of the lack of decay. In general, commodity renters are supposed to pay for the next generation of commodity stock as the current one decays. In housing, however, turnover (replacement of buildings) is so rare, it is hard to even define the “lifetime.” Thus, we instead ask tenants to pay back the loans, etc. for this generation. This initially appears fairly benign — as long as housing prices don’t change much over time, this should be equivalent. Prices do rise, of course, but that’s actually not the biggest problem with this paradigm (we will address this aspect later in the series). The more critical issue is that there is no relationship between the fixed schedule in which the full value is supposed to be replaced (usually, the terms of this are set by a 30-year loan) and the actual lifetime of the unit. The true lifetime is much longer, and the value you “use up” is therefore much less than you pay for. The landlord thus accumulates capital, rather than replenishes it, from this “replacement” term, and so their capital rapidly surpasses their initial investment. After 30 years, the full value of the property will be transferred from the tenants to the landlord, but the property, somehow, still exists!
The landlord’s exploitative trick is that you keep putting most of your monthly payment into this phantom replacement term, while the other two terms are just compensating them for “additional” work outside of “providing housing.” You are supposed to believe it is in some way important that collectively tenants pay off the equivalent of a 30-year mortgage every 30 years, even though the original construction workers are long gone and collect none of it. It is as if tenants were funding the construction costs of “replacement” buildings, even though tenants do not get their building replaced, nor do they need to. You aren’t really “paying” for your housing with the value you pay in excess of the landlord’s maintenance and labor. You are just having surplus-value extracted from you. The way it is set up now, the value of the house is always still ours to pay off, and we are not supposed to notice that eventually, the whole thing ought to be finished!
The landlord’s actual activity, represented by the maintenance and administrative terms, deserves to be paid at its value, (even if it might be morally better, less oppressive, etc. to remove the managerial, bureaucratic structure of the housing market); in other words let us assume that the landlord’s actual work is useful to society and makes renting possible, and this is a good thing. Nevertheless, no matter where the “initial cost” of the housing comes from, what is going on during the tenancy is only a transaction of their labor and expenses on the one hand for rent on the other. The tenant should not pay for (the construction of) the housing, because the tenant does not get (to keep) the housing. While they do consume a little bit of the property’s value, successful maintenance will restore the value, and this is why they pay for maintenance. Of course, property values in reality don’t seem to go down at all…maybe the landlords should be paying us for augmenting their property value, instead of making us pay them for supposedly “using it up!”
Perhaps you are not impressed. All I have proven is the obvious: Landlords exploit tenants. The question we must answer next is how, under capitalism, they can get away with this. The fundamental theorem of Marxism² is that commodities (a category which, as we argued above, includes rental-use) are exchanged at their value, unless social relations give one side or the other the power to suppress “free” competition. Is it truly the case that there is not sufficient competition between rental housing providers? Certainly there is a massive nonprofit industry which is supposed to be providing affordable housing — why are they consistently too weak to do so? Why does normal competition between landlords not help lower costs? To understand that, we will need to understand the financing of the real estate market.
Footnotes:
¹ This website aggregates some studies and concludes that the longest-term component of modern housing, the concrete foundation, can last about 200 years, with other parts needing occasional replacement. With special preservation techniques, they can last even longer.
² At least, my formulation of Marxism. See the first essay of the re.Marx blog, What is Exploitation?
