New home prices are rising in Las Vegas, with rising costs being blamed. Andrew and Dennis Smith write in the June edition of The Las Vegas Housing Letter, “Rising costs have been one of the key factors cited by home builders when it comes to rising home prices.”
Indeed, Trump-o-nomic theory has it that “trade wars are easy to win,” so each day seems to bring a tariff de jour or foreign retaliation. The political attack on Canadian softwood has lumber prices soaring and the Housing Letter calls attention to a possible shortage of domestic cement. For sure, skilled labor is in short supply and some subcontractors have just quit bidding projects in order to get caught up with the staff they have available.
So, do costs determine prices or do buyers? Many classical economists believed it was costs. As Robert Murphy explained in 2011, “the cost theory of value provided a coherent explanation for a genuine empirical regularity in a market economy. It really is the case that retail prices bear a strong correlation to the costs of production for various goods and services. The cost theory of value gave a plausible mechanism to explain this phenomenon.”
However, prospective new home buyers can walk out of model homes if they believe the asking price is too high. In a piece I wrote for mises.org , also in 2011, I made the point, “consumers in the Western world determine the prices — not by haggling — but by buying or not buying.”
For many months my desk was positioned in a corner of what my home building employer used as a sales office for a tract of homes he has under development a short distance away. In typical fashion, provided the market supports it, prices are increased as phases sell out. When customers asked why quoted prices in the future phases were higher than for the current phase under construction, the salesman would quickly offer “construction prices are going through the roof.”
Most home shoppers nodded their heads, maybe remembering their college economics class and the cost or labor theory of value. Of course, that statement is true, but, one day a customer replied,”That may be, but I think supply and demand are also at work.”
Indeed, as the father of the Austrian school of economics, Carl Menger, wrote in Principles of Economics ,
There is no necessary and direct connection between the value of a good and whether, or in what quantities, labor and other goods of higher order were applied to its production.… Whether a diamond was found accidentally or was obtained from a diamond pit with the employment of a thousand days of labor is completely irrelevant for its value.
My employer’s project is the only new development with homes for sale in a small town with local government growth restrictions. People want to live in this small city, and the locals don’t want any more neighbors. The number of existing homes for sale is few, thus, demand exceeds supply and prices can be increased; Trump tariffs or no Trump tariffs.
Not everyone who stops by purchases one of my employer’s cute little townhomes, and Menger explained why.
The measure of value is entirely subjective in nature, and for this reason a good can have great value to one economizing individual, little value to another, and no value at all to a third, depending upon the differences in their requirements and available amounts. What one person disdains or values lightly is appreciated by another, and what one person abandons is often picked up by another. While one economizing individual esteems equally a given amount of one good and a greater amount of another good, we frequently observe just the opposite evaluations with another economizing individual.
As Dr. Murphy explained, cost theory has things backward.
Here we see the methodological problem of the cost theory: By explaining final retail prices through the cost of making the goods, the cost theory implies that economic value is an objective property of physical items that flows from resources into the goods that they produce. In contrast, the subjective value theory of Menger and others starts with the valuation of consumer goods and works its way back through the prices of labor and other inputs accordingly.
Consumers decide what they will pay and determine value. Tariffs, the use of political force, determines where the buyer’s proceeds end up. Favored industries receive more and the entrepreneurs receive less, lowering their profits and making them less likely to take future risks in a similar political climate. As a real estate developer, the President should know better.
