In a post about the tendency for emergent urbanists to promote the idea of cities having a single equilibrium, Alon Levy recently wrote that collective choice is the best manner for determining urban form. Many urbanists accept that some of the top-down regulations that limit density or use are detrimental to cities, but they often stop short of suggesting that land use regulation should be abolished and transportation privatized, which I will support here with arguments based in Austrian economics. This post does not get to a critique of the collective choice that Alon supports; later entries in this market process series will address both the problems of creating urban policy through collective choice, and some of the institutions that have emerged within civil society that are essential to cities and their residents.
The cohort of economists and urbanists who support the elimination of land use regulation is small because cities present all of the problems that neoclassical and Keynesian economists describe as market failures, including externalities, high transaction costs involved in Coasean bargaining, non-excludable goods, etc. However, I believe that emergent solutions solve these problems more effectively than either central planning or collective decision making that becomes law, and the failed and inefficient government projects that urbanist bloggers write about everyday suggest that government failure is no trivial concern.
The first reason that regulation is a poor tool to for determining urban form comes from Friedrich Hayek. He clearly identified the calculation problem inherent in central planning: the information necessary to coordinate markets (including land use markets) is held by individuals with “particular knowledge of time and place.” Even assuming that urban planners are benevolent and seek to provide the best outcomes for their communities, they could never compile the knowledge necessary to determine what those outcomes are. Jane Jacobs identified the same problem in city planning that Hayek found in market planning because cities and markets are both emergent systems that coordinate human activity. She even coined the term “locality knowledge,” seemingly unaware of his writings on “local knowledge.” Of course urban development involves intense planning, but it should be done by entrepreneurs and consumers, who have the information necessary to make these decisions rather than bureaucrats. For anyone who hasn’t read Hayek previously, his essay “The Use of Knowledge in Society” provides a concise look at some of his most important insights.
Aside from the knowledge problem facing land use planners, another major reason not to forsake the free market for the planning commission is that planners do not have access to the feedback mechanism of profits and losses. Israel Kirzner, a scholar of Ludwig von Mises details the theory of market process most clearly in Competition and Entrepreneurship. He explains that unlike government entities, entrepreneurs get quick and accurate feedback on their products. If, for example, high-density apartments in a mixed-use neighborhood with good access to transit are renting well (as urbanists across the political spectrum tend to think they will) other entrepreneurs will see these profits and provide more of them to take advantage of this profit opportunity. If on the other hand, a certain style of housing in another part of town is not selling well and the entrepreneur is making losses, this development will not be systematically repeated as it might be under central planning (see: parking mandates that are higher than the free-market level, poorly designed public parks, public housing projects surrounded by open space).
Critics of free market urban development may argue that this system will produce less-than-perfect cities, so city planners should step in to make improvements. The Austrian response is that of course the free market cannot produce utopian cities, but no other system could do better. Believing that a regulated city would be superior to the market outcome is succumbing to the Nirvana fallacy. Markets aren’t perfect, but they’re the best we’ve got.
A blog post is clearly insufficient for explaining the knowledge problem and the market process that it took Austrian economists Mises, Hayek, and Kirzner many years and thousands of pages to work out, but I hope to expand and clarify on this subject of why regulators do not have access to the tools that are necessary to design cities. For a more detailed look at some of the areas where private cities would likely fare better than our current system, see Adam’s series on Rothbard the Urbanist.