24 Feb 2012

Why is Britain so expensive (the US so cheap)?

For many years, I have wondered why the cost of living in Britain is so expensive, not just compared to the US with its massive markets and cheap resources, but also compared to the Netherlands -- a densely-inhabited country of fewer than 20 million people.

My Scottish friend says "that's because capitalism was invented here, and we're good at screwing the last penny out of each other," but that explanation assumes market power to make extra on the one hand, and a collection of wealth (to those who are better at "screwing") on the other.

But that explanation had the seed of another idea in it. Perhaps the cost of living in the UK is so high because it reflects the TRUE cost of living. In the US, for example, labor costs are lower because pensions are not fully paid; resource costs are lower because environmental damages are not included in price; food costs are lower than they would be if negative externalities were included; housing costs are lower because houses are built to last 40-50 years instead of 100+ years; and so on...

Costs may be lower in the Netherlands due to their efficient bureaucracy (I registered my new address in less than 5 minutes), their cultural homogeneity (lower transaction costs), their openness to trade, and their housing density.

Does this make sense? Your thoughts?