Cities and the Market Process: Part 3

This series looks at some of the ways that people organize themselves to live alongside each other in cities. Part 1 looks at inherent problems with top-down planning, and Part 2 looks at the costs of local governments sanctioning collective choice. From this negative start, I’d like to turn to some of the advantages that make humans well-adapted to living in the urban environment, starting with some of Adam Smith’s insight in The Theory of Moral Sentiments.

Economists are often criticized, sometimes rightly so, for viewing people as perfectly rational and narrowly self-interested. Of course we are not. We all have unique motivators and preferences, which is what allows for the division of labor that we see in cities. One of the most important motivations, or “moral sentiments,” that we have comes in our desire for others to fare well and be happy. As Smith puts it:

Upon these two different efforts, upon that of the spectator to enter into the sentiments of the person principally concerned, and upon that of the person principally concerned, to bring down his emotions to what the spectator can go along with, are founded two different sets of virtues. The soft, the gentle, the amiable virtues, the virtues of candid condescension and indulgent humanity, are founded upon the one: the great, the awful and respectable, the virtues of self-denial, of self-government, of that command of the passions which subjects all the movements of our nature to what our own dignity and honour, and the propriety of our own conduct require, take their origin from the other.

This innate desire that most people have to relate to and be respected by those in their community makes people well-suited to city living. As Smith describes it, we generally seek approval from the “man within the breast,” a conscience that judges our actions based on their impact on others.

Economists typically discuss positive-sum games within the framework of trade in material goods; exchange makes everyone better off through the emergent order of the price system. Through our desire to earn approval from others, social norms create a similar emergent order. Of course we don’t always succeed in living up to these virtuous standards, but the fact the most people, most of the time are striving for others’ respect allows us to live peaceably alongside each other. In the dialogue of land use issues, the conversation often revolves around conflicts between individuals or stakeholders. However, if humans didn’t have an innate desire to get along, city living would be impossible, not merely prone to conflicts.

The Voluntary City, which we discussed in a podcast a while back, is based on this foundation of behavior that makes people well-suited to living in cities without the need for government intervention to regulate their behavior. In fact, as the authors discuss, civil society in a free market can take care of many of the things that we turn to government to take care of today, from crime prevention to unemployment insurance.

Unlike the market for goods and services, the market for behavior does not have feedback in the form of profits and losses. Still, though, human behavior has evolved over time so that by and large, behavior benefits both the individual and those around him.