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Donald Trump is now presumed to be the Republican Party’s nominee for President of the United States.  He is the latest in a long line of business leaders who have tried to use their supposed business success as a reason to be given political power.

This posting focuses on a frequently misunderstood difference between political decision making and business decision making.  Students misunderstand it when taught.  Journalists prefer stories of personal gain or injustice.  People in the real estate business confront this difference all of the time, since many aspects require some degree of political approval, even if those people do not always recognize it as the source of friction.

The essential problem is that a business is an open system, in the sense that workers can be hired or fired.  Or, a company can decide to invest resources in a project or not.  An activity which is outside of the company has no effect on the company’s profit.  Certainly, it seems like land which is not used now is not profitable to the company.

Politicians deal with more-or-less closed systems.  That worker who was fired from the company does not disappear; they remain in the system as unemployed or employed by a different company.  If one company does not go ahead with a project then a competitor can use the same land (perhaps for something more valuable).  Or, since land does not disappear, waiting may increase the value of the asset.  If not developed now then the city must live with the consequences: e.g. workers cannot find housing or manufacturers cannot find local warehouses.

The best discussion of this idea, at the level of a country, was written by Paul Krugman.  It was written for the Harvard Business Review when he was an academic.  The title of his article makes an important statement.  (The fact that he studied issues related to international trade means that you should compare them to Trump’s logic on winners and losers from international trade.)

I read a post on another blog which explores some of the same issues with a local focus.  People often shout about the effects of development, as though their obvious personal costs were the only ones worth considering.  Saying No does not mean that there are no effects.  Local economies adjust, and unintended consequences are still consequences.

Similarly, the debate about sustainable real estate is partly about the relationship between financial costs/benefits and other kinds of costs/benefits.

In any choice problem, regardless of whether it is spending money on beer vs. pizza, fine wine vs. stinky cheese or how/when to develop a property, the real question is never “What is the cost?”  Since opportunity costs are unavoidable, the real question is “In what form, does the cost appear?”

Businesses are used to dealing with financial costs but, from the perspective of a more-or-less closed system, not all costs are financial.

PS History Lesson: According to the Google Doodle, today is Jane Jacob’s 100th birthday.  To over-simplify, her work offered a system-based perspective on how cities thrive.

PA

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