One of the points Tim Harford makes in his excellent book The Undercover Economist is that the person who benefits the most from a busy cafe is the landlord of the premises in the form of rent. I think he used a coffee shop in one of the London railway stations as an example, but he made the point that if the outlet is in a very busy place full of wealthy customers, the business itself isn’t the goldmine you’d think it is. Sure, the business owner will put the prices up to reflect market rates but the increased revenue will be passed straight to the landlord in higher rent. This is why coffee shops everywhere run on slim but broadly similar margins, even if some are located in busier and more prosperous spots than others. No matter what the business owner does, the bulk of any additional monies will end up in the landlord’s pocket one way or another.
I was reminded of this when I turned on some news channel this morning and caught a man grumbling about how it was becoming difficult to recruit staff in London’s cafes, bars, and restaurants with Brexit looming. He ran some sort of posh cafe in a building I’m sure he doesn’t own, and was saying 85% of his staff come from overseas and applications for new positions are already down. He wailed that there wouldn’t be time to train up an entire new army of baristas and waiters within 5 years. He was also complaining that businesses aren’t having expensive breakfast meetings in his cafe any more, because Brexit is raising prices everywhere. The chap in question had a Scandinavian name and an accent, and if I’d been holding the microphone I’d have asked him why he’s not busy running overpriced cafes in his own country.
Okay, firstly he’s talking nonsense and is simply rent-seeking: if people aren’t applying for advertised jobs then he needs to improve the terms and conditions until they do. Secondly, businesses being unable to have trendy, overpriced breakfast meetings while being waited on by foreign hipsters is hardly a hill on which to fight Brexit. But more importantly, who is benefiting from these low-wage foreign employees? It’s not the customers: they will be charged what the market can bear. And Tim Harford’s case would suggest it’s not the business owner, but the landlord. Now I suspect in the short term business owners will have to take the hit of higher costs – which is why one of them is on TV complaining – but eventually the rents on the premises will have to come down if the businesses cannot maintain their minimum acceptable margin. In other words, the people who will suffer the impact of waiting staff becoming more expensive as a result of Brexit are landlords renting commercial property in London. I’ve just checked my heart and it isn’t bleeding.
There’s another point I want to make here, too. I’m no communist and I believe property owners should be free to do whatever they like with their property and charge what they like for people to use it, but there is something seriously out of whack in modern Britain (and in many other places, I suspect). If the way to make serious money – indeed, the only way – is to simply own property and rent it to those who are actually producing something, and those doing the producing see the fruits of their efforts siphoned off to the property-owning classes, things will eventually get ugly. For a start, the incentive to actually produce something will be severely diminished: why bother trying to run a business providing a service if the landlord will take the lion’s share of the proceeds? Better just to do something else – like work for the government. Another effect is that everyone pours money into property, causing inflation, which is exactly what’s happened in Britain’s housing market. If property is the only realistic investment option, what are people supposed to do? Thirdly, the situation will eventually become politically unacceptable and people will vote against the property-owners.
Now I know that the owners of city centre commercial properties are most probably large public corporations with shareholders, many of whom will hold stock in their pensions, but in politics perceptions matter. One of the issues on which I agree with Corbyn’s supporters is that the older generation have inflated and captured the wealth inherent in property for themselves and ring-fenced it to ensure its value will never fall. The younger generations have been priced out of owning property indefinitely, and with the massive levels of public spending and debt their meagre salaries are now paying for, it’s not surprising they’re quoting Marx and voting for Corbyn. Not that Marx didn’t write drivel and Corbyn won’t be a disaster – he’s not a solution to anything – but that doesn’t really matter in politics. What does matter is that a lot of people have a genuine grievance, and they will vote for whoever listens and pretends to do something about it. It’s easy to dismiss Corbynistas as batshit insane, mainly because most of them are, but deep within their grievances there are a few nuggets of truth, and they are important ones that highlight colossal failings of Cameron, Brown, and Blair.
I don’t know what the overall solution is, but if British youngsters now have an opportunity to work in London’s bars and cafes without being undercut by cheap labour imported for the benefit of wealthy landlords, I don’t think it’s a bad thing.
Even if he did own the building, it’d be the bank who would be extracting the bulk of the rent in the form of mortgage interest (unless he owned it outright).
As a former bar owner and long term hospitality professional, this is nothing new. It’s the way it has always operated. Let me introduce you to the 30/30/30/10 rule. This is the principal rule when setting up any type of hospitality venue.
30% goes to rent.
30% goes to staff wages.
30% goes to stock and running costs such as electricity.
If you get that right then you have 10% left over. That’s your profit margin. The reason that the industry is so tough, and why I assume the foreign guy was on TV having a good cry, is that operators get these margins wrong. All the fucking time. (Him winging about having to train staff is my number 1 way of spotting a crap operator.)
Ironically, if you know what you’re doing then the industry isn’t that tough. It’s why the same operators keep opening new establishments and making money.
As for landlords, they invested their money in purchasing a commercial property. This comes with some risk as business and tastes and fashion, (as in fashionable areas), can be fickle. So they need to make hay while the sun shines, and it can shine briefly.
There is a higher concept of rent at play here in London which is not the rental payment for the provision of a premise which is productive and is earned and is quite different from wealth creating Economic Rent. David Ricardo’s theory of “Economic Rent” ie an effortless gain, an unearned gain that is derived simply by owning something or owing a licence for it which in this case is the ownership of a property. It is this unearned gain that will ensure that the system that you have described will always survive in the current land ownership system. Yes, it is a fact that the landlords take most of the economic gain just as they do everywhere as at least 80% of all the real productive gain and earnings generated by a nations economy will always find it’s way to being transferred into increased land values.
How much more expensive would a current low paid Latvian Barista be than a days of old but comparable tea lady in a comparable tea shop. Don Riley in his book “Taken For a Ride” measured the increase in land value and his net worth due to underground rail line extension in London as up to 400% in a very short period of time in which he explores the impact of the building of the Jubilee Line Extension Underground line in London had on his property value.
“Don Riley visited the tunnelling site in the mid-1990s and has since commented how these men digging the tunnel were sweating hard, risking their lives, not knowing where their next job was coming from, while at the same time he, himself, was making money while he slept as his local land holdings appreciated in value as the line became a reality.”
There are two economies, the productive one which is measured in terms of GDP and the non-productive or extractive one called the Financial, Insurance & Real Estate (FIRE) economy, some call it the parasite economy. It works by the productive economy producing something of real value and then these earnings are invested or extracted into the FIRE economy for the investor to lay claim to their right to the future economic rent collection from the asset that is now held within the FIRE economy, this is the meaning of “Rentier” and the gains within this system must be effortless for them to be called “Economic Rent” which is not to be confused with property rent which is productive and is earned by the landlord in exchange for the provision of an amenity to a tenant. It is rare that this property rent will create actual wealth.
This economic system is well established and works at a far higher level than which party is in political control. It can reverse whereby the productive economy is contracting and then the economic rent can be negative. But when you look at London and its financial forecasts for at least the next 10 years there is very little chance of the Rentiers (land owners) not deriving massive economic rent during this period, simply by holding their land and taking the windfall gains.
Not forgetting that all of the government investment in infrastructure is taken up in increased value of the affected land. So, if you take two individuals one being a landowner and one not in this area, they both pay taxes, they both equally enjoy the improved amenity of the new infrastructure but it is only the land owner (Rentier) that will receive the massive unearned increased value (Economic Rent) to his land.
Thanks for the industry insight, Adam.
As for landlords, they invested their money in purchasing a commercial property. This comes with some risk as business and tastes and fashion, (as in fashionable areas), can be fickle. So they need to make hay while the sun shines, and it can shine briefly.
In many cases, yes. But in central London? The landlords are guaranteed high rents in perpetuity, mainly thanks to government largesse. I have no problem with landlords making money in a free market, but the property market has been so artificially skewed by the government in favour of the property-owning classes that it can’t possibly be called free-market any longer.
Even if he did own the building, it’d be the bank who would be extracting the bulk of the rent in the form of mortgage interest (unless he owned it outright).
True.
I’m increasingly convinced as I get older and less liberal that some form of planning is needed for a functional city. The ones we all love to visit – Paris, Vienna, Barcelona, Stockholm, were state-planned down to the last brick.
The lack of functional planning in existing British high streets is obvious for all to see – nothing but betting shops and Oxfam and Poundland. Really up-market places have an Iceland bravely making its way against the greenfield Lidl on the edge of town and Metropolises will even have a chippy.
Here in Gotham City the green market is slowly being destroyed. It’s long been the case that 95% of people go in one end and out the other without making a purchase – basically hinterlanders and tourists come to gawp at Gothamites getting their groceries. Several stallholders have realised there is more money to be made in selling coffee and donuts than radishes, and so gradually the best stalls are disappearing. And they aren’t setting up anywhere else because it would be useless to try absent 100 other complementary stalls. Barcelona is a huge city suffering the same effect on a much larger scale – the inability of limited space to cater for very different markets.
By comparision, London is just about large enough that it can cater for the few people stinking rich or dirt poor enough to still live there, and the tourists, at the same time, but the price of almost everything is literally out of this world.
Yes, there’s a market, but it takes a brave idiot to risk bankrupting themselves on extortionate rents for a 10% margin in an unpredictable economy. Which is why only chains dare.
The lack of functional planning in existing British high streets is obvious for all to see – nothing but betting shops and Oxfam and Poundland. Really up-market places have an Iceland bravely making its way against the greenfield Lidl on the edge of town and Metropolises will even have a chippy.
One thing I have noticed, and I like, about Paris is the number of independent businesses. Leaving aside the sheer number of independent cafes, most of which seem to be run by the owner who either owns the premises or isn’t being ass-raped in ever-increasing rents, there are also a lot of independent shops. Most shopping streets have several completely independent shops selling something or other, as well as all the usual chains. I have no idea how they do it, but it seems independent shops can survive in central Paris. This is one of the reasons I prefer it to London which, as you say, is pretty much 100% chain stores.
It was something that struck me in NL was the number of independents compared to the UK. In CH even more so, but I’m used to it now 🙂
Excellent post.
And yes, Harford is absolutely spot on. There’s another factor, of course. If rents are higher in London, that also means that staff cost more, as they have higher rents.
It’s why I advise people against going out for dinner in London. You can find 2* Michelin places in the provinces for considerably less and that’s about rents and staff. Same quality food. Probably less crowded dining rooms. And as a personal example to you – when we visit Paris, we hop on a 10 minute tube to dine in the outer arrondisements.
“why bother trying to run a business providing a service if the landlord will take the lion’s share of the proceeds? Better just to do something else – like work for the government.”
The problem with “work for the government” is that government itself is what increases rents. London, despite all the BS about how successful it is, is almost entirely parasitic useless state. You wouldn’t start a business supplying to the free market from London. It’s just an extra cost. The rents in London are expensive because that’s where Whitehall is, the BBC is, the National Theatre is, the Opera House is. And there’s a massive chain of things that then get created by pumping money into those there. Glaziers for the opera house are going to be employed in, or close to, London. Embassies are going to move there, which is going to create jobs for caterers in or near London. Lobbyists are going to place their businesses there, and pay for restaurants who are also going to be based there. Banking might be the one thing, but even then, I’m sceptical of how much that gets propped up by the state via licensing and bail outs. Why do you need to be running a hedge fund in St Paul’s rather than in Shrewsbury?
What you have to do is to get real, marketable skills. Not “position”. Not being some junior functionary in a wanky government department that doesn’t need to exist, but a real skill that people will willingly pay for, rather than under threat of violence. Because if you’ve got something like that which produces a real service or product, you can do it almost anywhere. You can seek out low-rent places. Look at some of our big success stories like Dyson, ARM, Rolls-Royce, Vodafone. They’re in Malmesbury, Cambridge, Derby and Newbury. Pinewood are moving out of West London and into South Wales.
The loudest people complaining about rents in this country are people who are a) not adding much value and b) not lowering costs. Journalists who could write their stuff anywhere instead of London, or find another job that pays better. Cafe owners complaining about the cost of baristas, when baristas are adding very little value. Go into McDonalds, you order on a touch screen. Then someone behind the counter pushes a button. It’s not bad espresso. It’s not great, but most of that is the beans, not the process.
“I have no idea how they do it, but it seems independent shops can survive in central Paris. This is one of the reasons I prefer it to London which, as you say, is pretty much 100% chain stores.”
France has lots of laws that kick in at around 20 employees, which increase costs, so at that point, your business becomes less efficient. So, few retailers bother expanding past that point. At a certain point, you overcome that with economies of scale, but that’s going to take some effort to get there. So, the only chains around are those that were around before those laws existed, like Fnac (est 1954), Monoprix (1932), Alain Affelou (1972) and Printemps (1865), or import chains that can invest heavily like McDonalds and Aldi.
Look at the “made in” label in your clothes. I bet it doesn’t say “Bradford”. Even that suit you bought from Yorkshire was actually tailored in Portugal, if I recall.
The rentier argument works only for markets not subject to external competition.
Free trade is the best solution. Always.
The proposition that much economic growth is bagged by the owners of property was explained by Smith – I’ve no reason to suppose that he claimed to be the first to think of it. (It’s been a while since I read The W of N.)
That’s why there’s a rational case for Land Value Taxation. Alas, I’ve never seen a proponent of LVT explain how to get there from here in a politically practical way.
“The ones we all love to visit – Paris, Vienna, Barcelona, Stockholm, were state-planned down to the last brick.”
By far the most beautiful urban landscape in Britain is the New Town in Edinburgh. It wasn’t “state-planned down to the last brick”: roads and building lines were defined and the landowners, architects and builders set about their work. It’s worth reading Sandy Youngson’s book on the subject if you want to see what is effectively a demolition of the argument for Stalinist town planning.
https://www.amazon.co.uk/Making-Classical-Edinburgh-J-Youngson/dp/074861768X
“That’s why there’s a rational case for Land Value Taxation. Alas, I’ve never seen a proponent of LVT explain how to get there from here in a politically practical way.”
That would be Georgists who still to this day are actively supporting “the least bad tax”, I think Winston Churchill was the last high profile political proponent of this tax, there are still many proponents that are quite active and meet regularly in this regard. The nearest we have come to it in the West is for landowners in new infrastructure corridors to pay some kind of levy towards the new infrastructure but to the best of my knowledge it has never been enacted. I think that there was some vigorous discussion about this for Crossrail 1 in London, it comes up frequently when considering funding for major projects in Sydney and Melbourne but thankfully it never seems to get any legs.
I doubt they will ever succeed because if they were to then this would be the biggest upheaval to social order and wealth distribution in modern history, our whole way of life that we have become used to would be upturned if this was to occur. Although they would also be adversely affected its not the mum and dad investors that I am talking about here, its the aristocracy, royalty, oligarchs and the elite that would be most disadvantaged and simply would just not stand for it, this is why property rights are perhaps the most violently enforced, ianalebale and enshrined sovereign rights in our society.
I would bet the house on on the status quo remaining in this regard.
“Georgist ideas were popular and influential during the late 19th and early 20th century.Political parties, institutions and communities were founded based on Georgist principles during that time. Early devotees of Henry George’s economic philosophy were often termed Single Taxers for their political goal of raising public revenue mainly from a land value tax, although Georgists endorsed multiple forms of rent capture (e.g., seigniorage) as legitimate. The term Georgism was invented later, and some prefer the term geoism to distinguish their beliefs from those of Henry George.”
No problem, it will all sort itself out: higher labour costs + less business => “Corbyn” => even larger guvmint => capital flight => poverty + low rents
Alternatively: ? => “Thatcher” => deregulation => innovation + more property construction => higher labour earnings + relatively lower rents.
But how do you collect the underpants?
Harford’s explanation is the best popular one of Ricardo on rent there is out there. Very good indeed in fact.
The solution, as far as there is one, is to relax the planning laws. Doesn’t completely sure it but helps a heck of a lot.
Harford’s explanation is the best popular one of Ricardo on rent there is out there. Very good indeed in fact.
It certainly stuck with me years later!
“No problem, it will all sort itself out: higher labour costs + less business => “Corbyn” => even larger guvmint => capital flight => poverty + low rents”
Yes Ivan there is the murkier side to the cheap labour discussion other than them being low skilled employers dreams, that being how cheap is the Labour Party. Nowadays whether they admit it or not they want “cheap” labour voting immigrants but historically they were anti immigration in defense of their constituents.
“Even a figure such as Keir Hardie, founding father of the Labour Party, led a fierce, xenophobic campaign against the Lithuanians. Hardie, as a leader of Ayrshire miners, wrote an article for the journal, The Miner, in which he stated that: “For the second time in their history Messrs. Merry and Cunninghame have introduced a number of Russian Poles to Glengarnock Ironworks. What object they have in doing so is beyond human ken unless it is, as stated by a speaker at Irvine, to teach men how to live on garlic and oil, or introduce the Black Death, so as to get rid of the surplus labourers.”
http://www.bbc.co.uk/legacies/immig_emig/scotland/strathclyde/article_2.shtml
“That’s why there’s a rational case for Land Value Taxation. Alas, I’ve never seen a proponent of LVT explain how to get there from here in a politically practical way.”
I say exactly the same thing about Basic Income schemes. In theory they have massively positive effects, yet no-one ever seems to implement them. Mainly I suspect because any country wishing at a certain point in its economic development to implement a welfare system has to decide between Means tested or Universal benefits. And as money is usually tight to spend on these systems, the decision is made to focus it on the most needy. This system then continues for decades, getting more and more generous as the country gets wealthier. Eventually the country is wealthy enough to consider a BI system. But the problem then exists that many under the means tested system would be worse off under the new BI scheme, which is politically unacceptable. So you can never move from the means tested system to the BI system.
The only way to do the switch would be to artificially restrict the growth of the existing benefit system to well below the growth of the economy, such that after X years there was sufficient meat on the bone to allow everyone to move to a new BI that was better than anything available previously. But thats never going to happen, as any time there’s a growth dividend some politician wants to spend it there and then.
Jim,
The main barrier to basic income is the big lie that means testing works. No-one wants to admit that it’s a system that’s easily gamed, a system that often ignores people and whose efforts to get people into work are mostly useless.
I used to work across the road from an unemployment office, yet I’d walk into town and see job vacancies in almost every shop window. And we know the problem, and it’s entirely understandable. No-one wants a shit job in Greggs that effectively taxes them at 80+% due to benefit withdrawal. I wouldn’t get out of bed and spend £4 on a bus for an extra £10-15/day.