Capitalism Begins at Home

Friday, January 9, 2015

Joseph Schumpeter argued that the miracle of capitalism lies in democratising wealth. Elizabeth I owned silk stockings, he observed, but the “capitalist achievement” does not lie in “providing more silk stockings for queens but in bringing them within reach of factory girls.” In most areas of life this miracle has been working magnificently: in America the number of hours of work that it takes to buy a car, or a wardrobe full of clothes, has halved in the past generation. But in three big areas it has singularly failed to operate: health care, education and housing.

The last few years have seen a ferment of ideas for improving productivity in medicine and teaching. Smart devices will let us monitor our health constantly and help doctors speed their diagnoses. Open-enrolment online courses will give everyone a free college education and iPads will provide universal schooling in Africa. The same cannot be said of housing, where the scope for a digital revolution is limited and productivity has been heading the wrong way: in America, labour productivity in the construction industry fell by 22% in the 20 years to 2009, even as it rose by 45% in the rest of the economy. In the rich world 60m people spend more than 30% of their income on housing; and in the emerging world 200m households live in slums. The combination of population growth and rapid urbanisation means that the numbers in each of these undesirable situations look set to swell.

A report by the McKinsey Global Institute (MGI) provides a good summary of one approach to the problem: applying economies of scale and scope to a fragmented industry. Value & Budget Housing Corporation, a privately owned Indian firm, mass-produces aluminium modules that can be slotted together into apartments of various sizes. China’s Broad Group can build a 30-storey block on a completed foundation in just 15 days, again using many factory-made parts. The MGI report notes that there is still vast scope for cutting the cost of building materials. Indian builders are making significant savings by using bricks made from fly ash, a waste product from coal-fired power plants. Britain has reduced the cost of raw materials for social housing by up to 30% since 2010 by establishing purchasing consortia.

Source: The Economist (link opens in a new window)

social enterprise