Economics – Market Urbanism http://marketurbanism.com Liberalizing cities | From the bottom up Thu, 31 May 2018 20:23:23 +0000 en-US hourly 1 https://wordpress.org/?v=4.9.6 https://i2.wp.com/marketurbanism.com/wp-content/uploads/2017/05/cropped-Market-Urbanism-icon.png?fit=32%2C32 Economics – Market Urbanism http://marketurbanism.com 32 32 3505127 Ch. 1 What is a City?: Cities cannot be efficient http://marketurbanism.com/2018/05/29/ch-1-what-is-a-city-cities-cannot-be-efficient/ http://marketurbanism.com/2018/05/29/ch-1-what-is-a-city-cities-cannot-be-efficient/#respond Tue, 29 May 2018 17:06:19 +0000 http://marketurbanism.com/?p=10074 Before we can correct what we think is wrong with a city, we need an appropriate standard of what is right. That standard of rightness in turn depends on our understanding how the thing we are trying to fix is supposed to work. In this regard I’m afraid neither standard macroeconomics nor microeconomics is much […]

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Before we can correct what we think is wrong with a city, we need an appropriate standard of what is right. That standard of rightness in turn depends on our understanding how the thing we are trying to fix is supposed to work.

In this regard I’m afraid neither standard macroeconomics nor microeconomics is much help at all.

In traditional macroeconomics, too much important detail is lost in its pre-occupation with aggregates and averages. For example, standard macroeconomic theory treats capital as homogeneous, and so makes no distinction between a hammer and a harbor, except that a harbor may be the equivalent of many, many hammers. Such an approach is too blunt an instrument for getting to the level of detail needed to appreciate the complex time-structure of capital of an economy, let alone to tell us what would be necessary to promote that structure (Lachmann 1978).  Jacobs expressed antipathy toward macroeconomics.

Macro-economics—large-scale economics—is the branch of learning entrusted with the theory and practice of understanding and fostering national and international economies. It is a shambles. Its undoing was the good fortune of having been believed in and acted upon in a big way (Jacobs 1984: 6-7)

Earlier in this Chapter we saw that, unlike a living city, a nation-state is not a natural unit of economic analysis. In Jacobs’s words:

Nations are political and military entities, and so are blocs of nations. But it doesn’t necessarily follow from this that they are also the basic, salient entities of economic life or that they are particularly useful for probing the mysteries of economic structure, the reasons for rise and decline of wealth. Indeed, the failure of national governments and blocs of nations to force economic life to do their bidding suggests some sort of essential irrelevance (Jacobs 1984: 31-32).

The limitations of standard microeconomics are in some sense even more severe. Efforts to make cities run more efficiently, for example, when “efficient” means something more than simply “the way I want to see things done,” run up against a deep conceptual problem (Ikeda 2010). Strictly speaking, an action is efficient when a person achieves a given end with the least costly of all available means. In other words, if you know what the most valuable end that you could be pursuing is, and if you know what the correct value of each of the possible means to achieve that end are, then your choices have a very good chance of being efficient. It would simply be a matter of matching the known, least-cost means to the known, highest-valued ends. But if you lack knowledge of any part of that ends-means framework, if your knowledge is not perfect, it would be impossible to tell whether any particular ends-means combination is efficient or inefficient. You can’t compare a given outcome with an ideal outcome if you don’t know what that ideal outcome might be. Efficiency might be appropriate in Louis Wirth’s 3-variable city but useless in a Jacobsian system of organized complexity.

The starting point of Jacobs or of Hayek or of Israel Kirzner (1973) is that a person is aware of only a small portion of the total amount of information she needs for the successful completion of her plans. Also, people make mistakes, plans conflict. Again, the social processes in cities are precisely what facilitate the discovery of conflicts and errors as well as harness the knowledge needed for their resolution.

Real markets are never efficient and neither are real cities. But the good news is that, given the nature of the trial-and-error process, we wouldn’t want them to be. As Jacobs puts it:

But I propose to argue that these grave and real deficiencies are necessary to economic development and thus are exactly what make cities uniquely valuable to economic life. By this, I do not mean that cities are economically valuable in spite of their inefficiency and impracticality but rather because they are inefficient and impractical (1969: 86).

To someone trained in standard economics that sounds paradoxical. If you understand why a city cannot be a work of art, however, it’s common sense.

A living city works by effectively combining what I call the “4 Ds,” diversity and density to generate discovery and development. Without going too deeply into what a normative standard consistent with promoting creative discovery would look like, I’ll just say that it would focus on whether the rules of the game empower creativity, more so than on trying to prevent the gales of dark destruction. The focus would be on what keeps creation ahead of destruction, and definitely not on how closely the outcomes we can measure match the ideal outcomes that we can only imagine.

 

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[In this space I’ll be posting quotes, ideas, and excerpts relating to a book I’m writing (thus far untitled), which I might describe as “What I have learned from the economic and social theory of Jane Jacobs.”  My hope is to get thoughtful, informed feedback that will be useful in shaping the book.]

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Cities are not man-made things http://marketurbanism.com/2018/04/10/cities-not-man-made-things/ Tue, 10 Apr 2018 16:36:16 +0000 http://marketurbanism.com/?p=9778 [In this space I’ll be posting quotes, ideas, and excerpts relating to a book I’m writing (thus far untitled), which I might describe as “What I have learned from the economic and social theory of Jane Jacobs.”  My hope is to get thoughtful, informed feedback that will be useful in shaping the book.] Architects and planners refer […]

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[In this space I’ll be posting quotes, ideas, and excerpts relating to a book I’m writing (thus far untitled), which I might describe as “What I have learned from the economic and social theory of Jane Jacobs.”  My hope is to get thoughtful, informed feedback that will be useful in shaping the book.]

Architects and planners refer to something called the “built environment” by which they usually mean things such as city streets and pathways and the grids made up by them, buildings of various kinds, plazas, the infrastructure of water and energy inflow and outflow, parks and recreation areas, unbuilt open spaces. Although parts of each of these urban elements were consciously constructed, usually by a team of individuals, the way that they fit together, except in the case of mega- and giga-projects, are not the result of a deliberate plan. Buildings in a particular location, for example, – offices, schools, residences, retail, malls, entertainment, places of worship, research facilities – are of different vintages, constructed by different people for different purposes at different times with different techniques, historical contexts, and sensibilities. But the way they all more-or-less complement one another, their “fit,” is an emergent, unplanned phenomenon.

I will refer to these elements collectively as the “built framework,” where the word “built” should not in all cases imply deliberate design.

What goes on within the built framework can also be planned or unplanned

There are, of course, the activities for which a particular element is intended (most recently, that is, because spaces can have multiple uses over time). A gas station, what we might call a “specialized space,” is primarily for pumping gas, not for seeing a football game, which you do at a stadium. But there are other activities that take place in or are facilitated by a given element, especially those that are “general spaces” such as sidewalks, that are not only unplanned but have significant regional consequences over time. They meet, plan, perform, work, play, and so forth on sidewalks and plazas in ways that no one could have foreseen.

However, even within a more specialized space, such as a corporate office, value-creating-but-unplanned discoveries (innovations or “intrapreneurship”) can take place. And certain specialized spaces, such as coffee houses or bookstores or concerts, are well-known for the serendipitous encounters and subsequent connections they enable.

  Private Space Public Space
Planned Order LIVING ROOM STREET PARADE
Unplanned Order FAMILIAL RELATIONS MARKETS & CITIES

Local economies are the context in which market processes largely take place. Cyber-commerce would seem to be an exception to this, but….

Our first step is to examine the microfoundations of cities. We examine, that is, how cities work from the point of view of individual actors at street-level.

The city is a relevant unit of economic analysis

Once we’ve grasped the nature and significance of cities and their local networks and processes that hold them together and keep them dynamically stable over time, we can examine the impact that the use of political means has on them.

The underlying assumption of Jacobs’s economic framework is that, like individual action, firms, and households in standard economics, the city (as she defines it) is a natural unit of economic analysis. That is, like individual action or a business or household, cities emerge spontaneously wherever economic development takes place, without the necessity of an exogenous act of creation, such as a city charter. And like a business firm, which standard economics has long regarded as a useful unit of analysis, cities need not always exist where there are people. Current estimates of the age of Homo sapiens range in the neighborhood of 300,000 to 350,000, but it’s only in the last 10,000 years that large settlements or proto-cities took root and human civilization began. (We examine some of this history in Chapter 2.) Today it is widely accepted that cities are a main driver of economic development and cultural innovation, a theme that we will explore in Chapter 5.

In contrast, nation-states are largely artificial creations with borders that are rigidly maintained except under exceptional circumstances. “The nation-state, which seems so powerful and fundamental today, is a late and transitory successor to the enduring city” (Vance 1990: 23). Cities tend to endure far longer than the states that encompass them. Cities are the locus of peaceful social change, cultural creativity, and economic revolution. States are the locus of social stasis, cultural reaction, and economic protectionism but the venue for war and violent political revolution. Note that I am not saying that nations-states as such cannot be units of analysis for economic theory and policy or for disciplines outside of economics. But they are essentially units of political analysis or political economy, not of purely economic analysis. Economists study them because (1) political boundaries create constraints on economic processes that have interesting consequences (e.g., international trade, exchange-rate movements) and (2) those with political interests (e.g., public choosers) want to know the national implications of various economic events or public policies. But cities that have spontaneously emerged over time are different. Like pure markets, a city is a “natural” unit of analysis. Indeed, I will argue that it may be useful to see the study of markets as essentially the study of cities.[1]

For instance, most of the concepts of (micro)economics pertain primarily to large settlements and cities. Take the following for example:

  1. competitive markets & impersonal exchange
  2. price system
  3. entrepreneurship & innovation
  4. extensive division of labor & division of knowledge
  5. weak ties & social capital
  6. externalities & public goods
  7. regional comparative advantage and efficiency

I hope the chapters that follow will clarify the close connection between these concepts cities. Like politics, economics is local.

What I hope you will take away from this book

To look and think about cities in a new way. To appreciate the nature and significance of cities in economic development and social and cultural change. To better see the limits of deliberate design, both private and governmental.

Again, the overall goal of my book is two-fold: 1) to educate a general audience about the nature and significance of the market process and how that relates to urban processes and 2) to inform professionals interested in market-process economics (and more specifically Austrian economics) and in urbanism (more specifically admirers of Jane Jacobs) how each can learn about economic and urban institutions and processes from the perspective of the other. I am aiming this book primarily at urbanists and afficianados of Jane Jacobs and secondarily at devotees of Austrian economics. My hope is that in doing so I can reach a wider, mainstream audience – there being far more admirers of Jacobs – while also enriching the analysis of Austrian economics.

Jane Jacobs didn’t call herself an Austrian economist, but she was one; she didn’t call herself a libertarian, and she wasn’t. She is I believe an excellent example of a liberal (in the American sense) whose policy prescriptions were however constrained by her grasp of economics. Her ideas complement an Austrian economist’s understanding of social processes but also can help the layman appreciate that “ought” presupposes “can.”

[1] I developed this argument in Ikeda (2007). https://link.springer.com/article/10.1007/s11138-007-0024-2

 

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Why another book about cities? http://marketurbanism.com/2018/04/06/another-book-cities/ Fri, 06 Apr 2018 15:11:19 +0000 http://marketurbanism.com/?p=9772 The starting point for Jacobs’s analysis and the focus of much of her thought is the city, its nature and significance. There are plenty of books out there that in some way celebrate cities.  Many describe cities as engines of economic development, wellsprings of art and culture, and incubators of ideas religious, social, and scientific. […]

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city books

The starting point for Jacobs’s analysis and the focus of much of her thought is the city, its nature and significance. There are plenty of books out there that in some way celebrate cities.  Many describe cities as engines of economic development, wellsprings of art and culture, and incubators of ideas religious, social, and scientific.  But few go very far in explaining why and how all that usually happens in a city.  Fewer still view the urban processes as expressions of “emergence,” or what some social theorists describe using the related term “spontaneous order.”  That is the perspective of this book and its main contribution: To look closely at what makes a city a spontaneous order and an engine of innovation, and to trace the analytical and policy consequences of viewing it this way.

Jane Jacobs is one of those exceptions, indeed an outstanding one.  In fact, she is probably the first to carefully examine, not only the nature and significance of cities, but to distill realistic principles that govern urban systems and to analyze the mechanisms of economic change that follow from those principles. Her analysis of the relation between the design of public space and social interaction offer insights that complement, and often exceed, those of Max Weber, Henri Pirenne, Georg Simmel (pdf), Kevin Lynch, and others. Her work also has deep connections with modern social theorists such as F.A. Hayek, Elinor Ostrom, Mark Granovetter, and Geoffrey West.

But she was not the first to develop conceptual tools congenial to understanding urban processes as emergent, spontaneous orders.  In fact they have largely been available for decades in the field of economics, although few professional economists, including urban economists, have fully appreciated the urban origins of many of their standard concepts and tools of analysis. Indeed, there is a tradition in economics and social theory that takes a Jacobsian view of the world in this sense.  It is a tradition that follows from the work of Adam Smith, Carl Menger, Ludwig von Mises, Friedrich Hayek, and Israel Kirzner, which I will refer to as the “market-process tradition.” Like Jacobs, this heterodox tradition sees social processes as the emergent, largely unplanned and self-regulating outcome of people who know a great deal about their local environment but very little about the larger system in which they are embedded, but with the right “rules of the game” can achieve a high degree of social order over time.  Like Jacobs it is concerned with how ordinary people may be able to use their own resources and resourcefulness to solve the problems they encounter in their daily lives, and how social institutions such as markets and market prices help them to do so through voluntary, often collective, action without resort to conscious central planning. Like Jacobs the market-process tradition finds little use for the concept of economic efficiency and static equilibrium and instead places greater importance on how individual incentives, entrepreneurial discovery, and innovation drive social processes and how specific social institutions interact with these forces over time.

But there are also important differences.

Whereas property rights and economic freedom are front and center to market-process economics, they are largely implicit, although no less essential, in Jacobs’s analysis. And whereas the market-process tradition has always emphasized the role of institutions in economic processes, it has only recently, like Jacobs, made the concepts of social capital, social networks, and trust a part of solving the central problem of economics: How countless strangers, operating under scarcity, human and natural diversity, and limited knowledge manage to achieve the level of social cooperation they do in market economies. Neither has the market-process approach gone into detail on the mechanisms of entrepreneurial discovery: The meaning and role of human and natural diversity in entrepreneurial development, the essential role of physical proximity, personal contact, and the design of spaces to a flourishing economic system. Finally, she and market-process economics see successful orders as those that not only solve problems, but more fundamentally those that discover, and even create, the very problems to be solved, and in so doing drive economic development and social change.

The trick to integrating these two perspectives to the benefit of each is to see that the market process and the urban process are the same phenomenon: A city is a market and a market is essentially a city.  That is what I try to do in this book.

With two outstanding exceptions, mainstream economists have mostly ignored Jacobs’s theoretical work.  One of those exceptions is Nobel-winning economist Robert Lucas, who devotes the last part of a lengthy article (pdf) on economic development that is otherwise bristling with equations to discussing (in words) insights that Jacobs has that might advance the topic.  The other is Harvard economist Edward Glaeser, who has written extensively on Jacobsian themes.  My theoretical framework, while not mainstream, and for precisely that reason, comes far closer to Jacobs’s theoretical framework – as distinct from the empirical questions she raises for Glaeser and Lucas.

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Intro to Culture of Congestion http://marketurbanism.com/2018/04/04/intro-culture-of-congestion/ Thu, 05 Apr 2018 03:01:17 +0000 http://marketurbanism.com/?p=9748 Welcome to the first post in Culture of Congestion! I’ll be posting quotes, ideas, and short essays relating to a book I’m writing, which I might describe as “What I have learned from the economic and social theory of Jane Jacobs.”  My hope is to get thoughtful, informed feedback that will be useful in shaping the book.  […]

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Jane Jacobs

Welcome to the first post in Culture of Congestion! I’ll be posting quotes, ideas, and short essays relating to a book I’m writing, which I might describe as “What I have learned from the economic and social theory of Jane Jacobs.”  My hope is to get thoughtful, informed feedback that will be useful in shaping the book.  – Sandy Ikeda


When I asked Jane Jacobs what she believed her main intellectual contribution was, she answered without hesitation, “Economic theory!”  It’s been my experience that most of those who admire Jacobs for her trenchant writings and fierce activism against heavy handed urban planning and top-down urban design find it surprising that she thought of herself at heart as an economist.  But a glance at the titles of her books makes this rather obvious: The Economy of CitiesCities and the Wealth of Nations, and The Nature of Economies. And in her most famous book, The Death and Life of Great American Cities, she explains in intricate detail a la modern social theory what social institutions and norms enable people to discover and pursue their plans at street level, and how doing so allows the city in which they are embedded to flourish in unpredictable ways.  She understood how creative innovation – in commerce, science and technology, and culture – is central to that flourishing.  She explained, in a way that rivals or surpasses most economic theorists, how and under what conditions innovation takes place and how that tends to undermine attempts at central planning at the local level.

One of my motivations for writing this book is to make Jane Jacobs, economist, better known especially to those who already rightly admire her for the other contributions she has made as a public intellectual, and to trace her criticisms of urban planning and design and of various public and private policies, which have gained supporters across the ideological spectrum, back to a coherent social and economic framework.  My second aim then is to highlight and develop Jacobs’s socio-economic framework and to show how most (though not all of) those criticisms flow from that framework.  In short, this book is about what I have learned from Jane Jacobs about social and economic theory.

 

 

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Why Walkable Cities Enjoy More Freedom http://marketurbanism.com/2018/03/12/walkable-cities-enjoy-more-freedom/ Mon, 12 Mar 2018 11:49:52 +0000 http://marketurbanism.com/?p=9657 If you happen to visit Egypt and find yourself in the famous Tahrir Square, you might be puzzled: how could this space accommodate two million protesters? In fact, the square looked different at the time of the Arab Spring, up until the new military government ringed its central part with an iron fence. A similar transformation happened […]

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Tahrir Square

If you happen to visit Egypt and find yourself in the famous Tahrir Square, you might be puzzled: how could this space accommodate two million protesters? In fact, the square looked different at the time of the Arab Spring, up until the new military government ringed its central part with an iron fence. A similar transformation happened with the Pearl roundabout in the capital of Bahrain where demonstrators used to gather — it was turned into a traffic junction. In my hometown, Moscow, the square where millions called for the end of Soviet rule in 1991 now houses an hideous shopping mall.

For a pro-liberty movement to raise its head, Twitter is not enough: face-to-face contact is crucial. That is why when oppressive governments want to destroy civil society, they destroy public spaces. Street markets, green squares and lively parks (think of the iconic Hyde Park corner) are places where citizens meet, negotiate and slowly learn to trust each other. Joseph Stalin knew it well, hence he made sure that city dwellers had no public spaces to socialise in. The results were devastating: chronic mistrust that post-communist societies are yet to overcome. Today, 30 years after the fall of the Berlin Wall, the levels of social capital in Dresden and Leipzig are still lower than in Munich and Hamburg, which bears its economic as well as political costs.

One study shows that residents living in walkable neighbourhoods exhibit at least 80% greater levels of social capital than those living in car-dependent ones. That is something to consider, given that only a half of Brits know their neighbour’s name. The economic benefits are also clear: improved walking infrastructure can increase retail sales by 30%. London has witnessed it on Oxford Street where the creation of a Tokyo-style pedestrian crossing led to a 25% increase in turnover in the adjacent stores.

In the 20th century, the world has fallen in and out of love with urban utopias. Le Corbusier’s “Radiant City” with its enormous avenues and gigantic block houses is probably the most famous (or infamous) proposal — look for gloomy pictures to get an impression on how Paris would look like if his ideas were put to practice (or just imagine Barbican extended to the size of a city). American journalist and one of the founders of modern urban studies, Jane Jacobs, challenged these ideas in “The Death and Life of Great American Cities” while praising spontaneous order in urban development.

What was common for the socialist urban projects? They glorified the automobile as a means of transportation. In contrast, the most appealing examples Jacobs presented in her book were all neighbourhoods with intense pedestrian flow. Besides boosting community life and helping cities to prosper, she argues, walkable cities are also safer ones. More pedestrians means more “eyes on the streets”, which lowers the need for police surveillance (Britain has almost 6 million CCTVs, one for every 11 people).

That’s all fine, but who pays? It’s true that large-scale urban redevelopment projects can be very expensive. However, engaging with private capital has proven to be a viable strategy both in and outside of the UK. One inspirational example comes from right across the Channel. In Rotterdam, local architects proposed a pedestrian bridge that would link two parts of the city separated by a railroad. When the local government refused to fund it, they launched a public crowdfunding campaign and raised enough money to complete the project. This is a perfect example of how social capital can bridge aspirations and reality — sometimes even literally.

Many citizens are sceptical about large-scale urban projects, and for a reason: the most ambitious of them are being implemented in a top-down-way. Take Barcelona’s car-free ”superblocks” or Paris’ mayor’s pledge to halve the number of private cars — both faced strong opposition from residents. Back in the sixties, Jacobs warned against one-size-fits all solutions. In one of her public speeches she pointed to the corner grocery store as a sign of commercial diversity in a city — and soon began to receive projects where planners literally allocated slots for corner grocery stores. Such “patronising conception”, she argues, is not something a modern city needs.

Of course, there will always be NIMBYs (“Not In My Backyard”) opposing any changes to the city landscape, but YIMBY movements are gaining momentum. A few years ago, when I was serving as an elected official in Moscow, I was the only outspoken YIMBY in my district. Once at the public hearings I was even accused of being bribed by the developer — just because I supported a private park project! Here, once again, we face the problem of trust, and it is hard to blame people for being distrustful when social ties are so weak. This vicious circle — no public spaces so no social capital, no social capital so no public spaces — should be finally broken.

Vera Kichanova is a recipient of the John Blundell Studentship. She was the first Russian libertarian to be elected to public office and is currently working on her doctoral dissertation on market urbanism at King’s College London.

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Density Is How the Working Poor Outbid the Rich for Urban Land http://marketurbanism.com/2018/02/05/density-working-poor-outbid-rich-urban-land/ Mon, 05 Feb 2018 15:00:38 +0000 http://marketurbanism.com/?p=9582 The great failing of modern land-use regulation is the failure to allow densities to naturally change over time. Let me explain. Imagine you are trying to sell a property you own in a desirable inner suburban neighborhood in your town. The lot is 4,000 square feet and hosts an old 4,000 square-foot home. There is […]

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multifamily housing

The great failing of modern land-use regulation is the failure to allow densities to naturally change over time. Let me explain.

Imagine you are trying to sell a property you own in a desirable inner suburban neighborhood in your town. The lot is 4,000 square feet and hosts an old 4,000 square-foot home. There is incredible demand for housing in this area; perhaps the schools are good, or the amenities are nice, or the neighborhood sits adjacent to a major jobs center, meaning that residents can walk to work. I’ll leave the reasons to you. Who do you sell it to?

You have at least two options: First, you could sell it to a wealthy individual, who would use the entire property as his home. He is willing to pay the market rate for single-family homes like this, which in this case is $300,000. Under current financing, he would likely have a monthly mortgage payment in the ballpark of $1,300. Second, you could sell it to a developer who intends to subdivide the house into four 1,000 square foot one-bedroom apartments, renting each of them at a market rate of $500 to service workers who commute to downtown. After factoring in expenses, her annual net operating income would be around $20,160. Assuming a multifamily cap rate of 6.0.%, this means that she could pay up to $336,000 for your property.

Based on this analysis, who do you sell it to? The answer is obvious: you will sell it to the multifamily developer who will subdivide and rent out the house, not necessarily because you’re a bleeding heart urbanist, but in order to maximize your earnings. As rents in the area rise, the pressure to sell to a buyer who would densify the property will only grow. The prospective mansion buyer simply cannot compete with the service workers under these very typical market conditions. How cool is that?

This may sound like an oversimplification. As with all economic examples, it is. But at the end of the day, these very simple market dynamics play an essential role in guiding the spatial patterns of our cities. When demand for housing grows in urban neighborhoods, low-density uses will convert into higher density uses. This might often start smallhomeowners converting underutilized floorspace in attics and basements into additional housing units to earn incomeand under high demand circumstances might escalatetearing down single-family homes and constructing apartment buildings.

When my great grandmother, a grocery store clerk and single mother, migrated to Louisville from a small town in Kentucky in the 1940s, they shared a subdivided mansion in Old Louisville with multiple other working-class families. The opposite also happens occasionally: when demand for housing falls, high density uses may be converted into low-density uses, or demolished altogether. When Louisville’s population collapsed in the 1970s and 80s, the glorified tenement my grandmother grew up in was converted back into a mansion owing to lack of demand.

Thus, density is the key to ensuring that the incredible opportunity that cities offer is available to everyone. It’s the only sustainable way that the working poor can outbid the rich for urban land, and it’s naturally facilitated by markets under normal conditions. Density is what makes a room in an old mansion affordable to a grocery store clerk struggling to provide for her children. Density is what enables the apartment developer discussed above to outbid the prospective mansion developer for land, because in a sense what she is actually doing is pulling the resources of those working poor families.

Density controls, whether the result of zoning, land-use regulations, or subdivision regulations, break this system, effectively prohibiting the working poor from outbidding the rich for urban land. These policies come in a variety of forms: minimum lot sizes, single-family zoning, parking requirements, minimum unit sizes, etc. But they all require some minimum level of housing consumption—purportedly for the residents own good, in many cases—which means that residents who cannot afford to consume this minimum threshold of urban land cannot consume housing in this neighborhood at all.

Let’s return to our above example. If your property was zoned for single-family housing, the developer who intended to subdivide wouldn’t even bother to bid and the structure would remain a single-family home, despite high market demand. The four prospective tenants would have to look elsewhere, bidding up other scarce units and suffering longer than desirable commutes.

Or imagine if the city allowed subdivisions, but restricted apartments to 1,500 square feet. In this case, the developer could only divide the house into two units. Rents normally rise with floorspace and additional bedrooms, but they rarely double in price. If the developer could only earn $800 per unit on the market, she could only justify spending $268,000 on the project, meaning she would be outbid by the prospective mansion buyer. If she could squeeze out $900 per unit, she would barely outbid the prospective mansion buyer, letting in only two tenants, and only those who could afford a 45% increase in rents. The two other tenants would be forced out of the community. Other mandatory minimum standards like parking requirements and lot sizes work the same way, prohibiting density and pricing potential residents out of the community. Needless to say, this process falls hardest on the working poor.

Banning density, whatever the pretense, whatever the means, effectively means banishing the working poor from cities. As the urban planner Alain Bertaud has put it, the market is not an end or a construct, it is a mechanism. It is an emergent system for distributing scarce resources. Sometimes it fails and state actors or civil society must intervene. Sometimes it produces undesirable outcomes that warrant rectification. But if we don’t understand it and work to build policy around it, the results will be ugly. From the mounting affordability crisis to the income and racial segregation of our cities, the failure of shifting responsibility for the distribution of densities from markets to planning boards has been a self-evident failure.

For future content and discussion, follow me on Twitter at @mnolangray.

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Zoning Laws, the Housing Market and the Ripple Effect http://marketurbanism.com/2017/12/28/zoning-laws-housing-market-ripple-effect/ http://marketurbanism.com/2017/12/28/zoning-laws-housing-market-ripple-effect/#comments Thu, 28 Dec 2017 13:23:18 +0000 http://marketurbanism.com/?p=9332 The adoption of zoning as a means of preventing external costs led to inefficient use of land and caused many individuals to suffer great unfairness.

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ripple effect housing

 Henry Hazlitt has called economics a science of recognizing secondary consequences. What he and others who have taken the time to study the working of free markets have perceived is that there is a natural orderliness in uncoerced dealings between men which tends to maximize the well-being of each individual and put resources to their best use. But to accomplish this, a market must be free, which means that each participant must be allowed to decide for himself how he will use his assets, whether personal skills, money, or physical property. Whenever government compels a person to use his property in a way other than he would freely have chosen, this natural orderliness is upset.

The effect of any such tampering with a market may be likened to throwing a stone into a calm pool. Waves of disturbance will ripple outward. Unfortunately, government will now look upon these ripples as new problems calling for its false remedies, and throw more stones in an attempt to neutralize the unwanted and unforeseen consequences of its earlier stone-throwing. I call this the ripple effect; it is nothing other than a failure to foresee secondary consequences.

This article is about one form of governmental interference with free markets which nicely illustrates the ripple effect. It is about zoning ordinances, particularly those which regulate the type of housing a person may build on his property. Such ordinances demonstrably have worsened the housing situation in this country, have been a vehicle for much manipulation, unfairness and favoritism, and, of course, have spawned new coercive remedies designed to set aright the problems zoning has caused. What government cannot see is that these “remedies” will even further impair the functioning of the housing market.

A Primer on Zoning

A zoning ordinance is a decree by government that land in its jurisdiction may be used only in accordance with its regulations. These regulations are contained in a zoning map, which designates the permissible uses for property in each zone. For example, a subdivision might be zoned to permit only single-family dwellings on lots of one acre or more.

The original rationale behind zoning was that it was necessary to prevent nuisances. City governments thought it desirable that industry and retail trade be segregated lest their attendant smoke, noise, and traffic impose costs on residential areas. The paradigm case zoning was aimed at would be the construction of a steel mill on a quiet, shady street. Zoning based upon this argument was upheld by the Supreme Court even though its adoption might cause an enormous loss to the owner of affected property. 1

Zoning, however, was not limited to the segregation of industrial from residential areas. It was also used to demarcate the boundaries for single-and multi-family housing. When challenged in court, cities argued that allowing apartment buildings to be constructed next to single-family houses would shut off air and light to the latter, increase noise and traffic, and deprive children of places to play. Lurking behind these doubtful arguments (which the Supreme Court also accepted as justifying zoning of this nature) was the objective of protecting the property values of homeowners against the decline which would follow if their area became less exclusive. It will be observed that this concern has nothing to do with true nuisances such as pollution and noise, but rather is an attempt to use the coercive power of government to protect against those losses which free markets must necessarily sometimes inflict.

The Law of Nuisance

The common law had long recognized actions for nuisance when zoning first became popular. This action was based upon the idea, inseparable from the argument for freedom, that one does not have a right to make use of his property in such a way as to injure or render less fit for use the property of another. If one did so, he might be compelled by a court to pay for the extent of his damage, and the destructive use might also be enjoined.

Now, it cannot be said that nuisance suits ever became a perfect solution to the problem of externalities (the imposition of costs by one landowner upon his neighbors). Legal actions have high transaction costs, and success is never a sure thing. And if the losses were spread over a large number of people—e.g., smoke damage from a steel mill—almost certainly no one of them would feel sufficiently aggrieved to undertake the expense of a lawsuit (at least prior to the advent of the class action). These factors served to deter many from asserting their legal rights.

All this may be admitted without indicting nuisance law for any inherent flaw. Courts and legislatures could have devised new procedures fairer to plaintiffs and new remedies for accommodating competing interests had they seen the necessity to do so. Nuisance law, however, has suffered from extreme neglect during the nation’s half-century infatuation with zoning. Even so, there have been noteworthy nuisance cases in the last few years, indicating that zoning is not the only answer to the externalities problem.2

Zoning vs. Nuisance Law

It is important to compare the way in which zoning and nuisance law operate. Nuisance law is based on the market idea that one should pay for the costs that he causes to be incurred, and works punitively—at least until people come to know what uses will probably cause them to have to pay penalties. At that point, uses for which the expected costs are too high will be deterred. Thus, nuisance law should—or could—lead to the same sort of economic calculation which underlies any business decision. An entrepreneur would decide against building a steel mill in a residential area for the same reason he would decide against building one where it was difficult to get raw materials—the costs Would be too high. On the other hand, a contemplated use of land, a grocery store, for instance, might impose small costs on the neighboring owners, but still be a worthwhile project because of large expected returns. It is this sort of rational economic calculation which optimizes the use of resources. Zoning, however, does not allow individual decisions as to the costs and benefits of the uses of land. While zoning may prevent some nuisances3, it lacks the ability to discriminate between nuisances which are worth their cost and those which are not, and prohibits some land uses which would not be nuisances at all. This is so because zoning is not predicated upon a calculation of costs and benefits, but only upon a planning “expert’s” notion of how cities ought to be patterned. With zoning, we pay a high cost in efficiency to prevent an unknown but probably small number of nuisances. The planners cannot know how much land will be demanded for each possible use at the time they draw up the zoning map; too much may be allocated to light industry, or too little to multifamily dwellings. As a result, we have waste and inefficiency.4

“Exclusionary” Zoning

Now we meet the villain of the piece. After the courts gave the green light to zoning, people quickly realized what a powerful tool they had been given. All manner of restrictions might be put on the use of land which would guarantee that “undesirable types” would have to live somewhere else. Municipalities frequently enacted ordinances requiring a minimum lot size of an acre or more; often there was no provision for apartment houses and mobile homes, while in some cases they were even affirmatively excluded. Various rationales were advanced to justify these interferences with freedom, but none more than tenuously linked to any proper governmental function of protecting health or safety, or preventing nuisances. At the bottom was always the desire to exclude people of lesser income from the community.

It was in the mid-sixties that the people who are usually so fond of government planning and who enthusiastically support zoning as long as it is “only” commercial interests which are affected, realized that they had created a monster. The shoe was on the other foot now—one of their favored groups, the poor, was being victimized by zoning. The result was a large number of courtroom battles over the legality of what was called “exclusionary” zoning. (All zoning is exclusionary, but never mind.)

The Legal Outcome

In several cases, courts struck down large minimum lot size ordinances. Those who believe in freedom can applaud such decisions; if a group desires to insulate itself from the rest of society, it may do so by purchasing enough land to achieve that objective, but it is wrong to do so through the use of the coercive power of government. Unfortunately, not all courts and legislative bodies were content with a mere restoration of freedom. Instead, they sought to rectify the problems created by zoning by imposing even more zoning.

The leading case, Southern Burlington County NAACP v. Township of Mt. Laurel, comes to us from the Supreme Court of New Jersey.5 In ringing language, the court invalidated the town’s highly restrictive zoning scheme, and then intoned that every developing community has an obligation:

Affirmatively to plan and provide, by its land use regulations, the reasonable opportunity for an appropriate variety and choice of housing, including, of course, low and moderate cost housing, to meet the needs, desires and resources of all categories of people who may desire to live within its boundaries.

The animating force behind the court’s ruling was not a belief in liberty, but rather a simple-minded mathematical notion that each municipality should contain its “fair share” of low- and middle-income residents.

This idea that people should be distributed throughout society in accordance with precise ratios shows forth even more disturbingly in the so-called “inclusionary” zoning ordinance. The concept, which has found some support in academic journals6, is to require a developer to include a specific percentage of units for low-income families if he is to be allowed to construct any multifamily project. Such an ordinance was enacted in Fairfax County, Virginia, but was held unconstitutional by the Supreme Court of Virginia.’

Making the Problem Worse

Both the Mt. Laurel “fair share” requirement and the “inclusionary” ordinance recognize that zoning has been used to limit the number of places where poor people might live, and seek to remedy the shortage of housing which has resulted. But at best they will be ineffective, and will probably succeed in making the problem worse.

New housing is seldom constructed expressly for the poor. (One exception, of course, is the federal government, but its efforts, such as the famed Pruitt-Igoe project, have been smashing failures.) Rather, the poor benefit from the filtering down of older housing left empty as wealthier individuals move into new or better homes. Careful empirical studies have demonstrated that this intuitively appealing proposition is true.8 Therefore, to the extent that “inclusionary” ordinances or judicially mandated “fair share” plans operate to decrease the total amount of housing which is constructed, they will work against the poor by diminishing the filtering down of older housing.

There are a number of reasons to believe that these legal mandates will, in fact, lead to less housing construction. Consider first the likely eventuality that, under a “fair share” requirement, an incorrect amount of land would be zoned for low-cost housing—i.e., more or less than would be so used in an unhampered market. This must be considered likely because a developing community cannot know what sort of commerce will choose to locate in it, and hence the characteristics of the workforce which may desire to live there will also be unknown. Merely because there is a heavy-industry zone, for instance, there will be no reason to assume that some specific percentage of poor people will be employed. The skill and income level of the workforce will vary greatly depending on whether labor or capital intensive industries move in. Thus, the planner’s guess will probably be wrong when he zones for housing. If too much land is allocated for one type of housing, too little must be for other types. Some land will be inefficiently used, total construction will be less than we would have had in the absence of zoning, and fewer old homes will become available to the poor.

Discouraging Developers

Secondly, we must consider the attitudes of the would-be developers ordered by an “inclusionary” ordinance to use a part of their property for the construction of low-cost housing. They may be reluctant to undertake the project thus presented for any of several reasons. With the mandatory low-income units, the overall rate of return may not be sufficient to induce the builder to devote his resources to this development as opposed to one where he finds no government interference. Or, the developer may have doubts about the marketability of the non-low-income units if compelled to put them in close proximity to those built for the poor. A related concern might be the possibility of high maintenance costs for the low-income units. Reflection upon the way property frequently is treated in the inner city might well dissuade one from building with the poor in mind as tenants. Yet another obstacle might be the architectural difficulties of integrating the smaller low-income units in the same structure with larger apartments designed for the affluent.

Thirdly, many of the reasons which might make the developer hesitant would also be on the minds of prospective lenders. Even if the former were willing, the latter might not be. The result: housing construction foregone.

Two more arguments tell against these schemes to provide better housing for the poor. So far we have left out the intended beneficiaries of this new housing, the poor themselves. Are many of them likely to be interested? Professor Banfield has pointed out that the inner-city dweller is accustomed to the nature of life there, and probably would feel bored and uncomfortable if transported out to suburbia.9 The spaciousness and solitude would be entirely alien, and the preferred entertainments and companionship would be far removed. In short, there is reason to doubt that there would be enough takers for this housing to fill the government’s quotas, leading to further waste.

Lastly, it must be emphasized that low-income housing is quite infeasible without government subsidies. The Mt. Laurel court expressly noted this. Do we really want the availability of housing for the poor to depend upon the caprices of federal and state budgeting? The government is anything but a trustworthy provider. A change in administration or voter sentiment could halt building in progress and prevent new construction from being undertaken, again to the detriment of the poor. Uncertainty is one of the prices one pays for government dependence.

No doubt there are more arguments, and perhaps more persuasive ones which could be advanced against these plans. All I have attempted to accomplish in this brief space is to show that the government did not, and indeed cannot, take into consideration all of the reactions one might expect to its tampering with the housing market. Not enough housing for the poor? Why then just zone for more, or compel people to build more, says the government. This simple minded solution pays no heed to secondary consequences, and forgets that people have minds and wills of their own. That is why it will fail.

Conclusion

The adoption of zoning as a means of preventing external costs was ill-considered in the first instance. It led to inefficient use of land and at the same time caused many individuals to suffer great unfairness. Once this authoritarian power to restrict the uses to which a property owner could devote his land was acknowledged as legitimate, it followed inexorably that it would be misused to protect well-placed interests and exclude poor people from developing communities. In attempting to solve this government-created problem in the housing market, courts and legislatures have resorted to more of the statist medicine of coercion. “Inclusionary” zoning and “fair share” plans will not make more housing available to the poor, and will probably have the opposite effect. Then, we may confidently predict, government will react with yet more counterproductive laws and directives.

The radical solution to the chaos zoning has brought to land markets is to eliminate it. To be sure, people then will erect some buildings and do other things with their property that others will not like. If those uses actually interfere with the enjoyment of property by others, those people affected should be encouraged to sue in nuisance to obtain compensation for the damage done. If the offending use does not amount to a true nuisance—an apartment with poor people as tenants, or a building painted an ugly color—that is something people who live in a free society will just have to tolerate as one of the annoyances of life. The alternative to a regime of freedom in land use is zoning with its ever-present potential for waste and inefficiency, inequity and manipulation. Let us choose freedom.

‘ Village of Euclid v. Ambler Realty, 272 U.S. 365 (1926). The value of Ambler Realty’s holding fell by $300,000 when its tract was put in a residential zone.

²See, e.g., Boomer v. Atlantic Cement Co., 287 N.Y.S.2d 112. The court there refused to enjoin the operations of a cement plant, but awarded the plaintiffs the amount by which their property had been permanently damaged (based on market value) plus an amount equal to the ongoing monthly costs the plant imposed on them.

³It is not clear that cities would look much different in the absence of zoning. Professor Siegan points out in his book Land Use Without Zoning that Houston has no zoning, yet the market has neatly segregated industrial and residential districts simply on the basis of the differing characteristics which attract each type of development.

“Zoning decisions, it must be said, are not unalterable. Zoning maps may be changed or variances granted. But it is never certain that zoning mistakes will be corrected through these mechanisms. Whether a zoning change is made or blocked usually does not depend upon abstract considerations of eff¹ciency, but rather on the ability of interested parties to pressure the decision makers. Moreover, these escape hatches from zoning have frequently been used by unscrupulous persons to gain windfalls. See Ellickson, “Alternatives to Zoning”, 40 U. of Chicago Law Rev. 681, 701-05.

5336 A.2? 713. 6See Kleven, “Inclusionary Ordinances—Policy and Legal Issues in Requiring Developers to Build Low Cost Housing”, 21 UCLA Law Rev. 1432.

‘Board of Supervisors v. DeGroff Enterprises, 198 S.E. 2″ 600.

8See Lansing, Clifton and Morgan, New Homes and Poor People: A Study of Claims of Moves, Survey Research Center, Institute of Social Research, Univ of Michigan (1969). 9See The Unheavenly City, especially chapter 2.

George C. Leef


George C. Leef

George Leef is the former book review editor of The Freeman. He is director of research at the John W. Pope Center for Higher Education Policy, and is a graduate of the Duke University School of Law, Durham, North Carolina.

This article was originally published on FEE.org. Read the original article.

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The Distorting Effects of Transportation Subsidies http://marketurbanism.com/2017/12/14/distorting-effects-transportation-subsidies/ http://marketurbanism.com/2017/12/14/distorting-effects-transportation-subsidies/#comments Thu, 14 Dec 2017 13:15:04 +0000 http://marketurbanism.com/?p=9121 Subsidies to transportation tend to lengthen supply and distribution chains. Large corporations are artificially competitive against smaller, local firms.

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by Kevin Carson

This article won the 2011 Beth A. Hoffman Memorial Prize for Economic Writing.

Although critics on the left are very astute in describing the evils of present-day society, they usually fail to understand either the root of those problems (government intervention) or their solution (the operation of a freed market). In Progressive commentary on energy, pollution, and so on—otherwise often quite insightful—calls for government intervention are quite common. George Monbiot, for instance, has written that “[t]he only rational response to both the impending end of the Oil Age and the menace of global warming is to redesign our cities, our farming and our lives. But this cannot happen without massive political pressure.”

But this is precisely backward. Existing problems of excess energy consumption, pollution, big-box stores, the car culture, and suburban sprawl result from the “massive political pressure” that has already been applied, over the past several decades, to “redesign our cities, our farming, and our lives.” The root of all the problems Monbiot finds so objectionable is State intervention in the marketplace.

In particular, subsidies to transportation have probably done more than any other factor (with the possible exception of intellectual property law) to determine the present shape of the American corporate economy. Currently predominating firm sizes and market areas are the result of government subsidies to transportation.

Adam Smith argued over 200 years ago that the fairest way of funding transportation infrastructure was user fees rather than general revenues: “When the carriages which pass over a highway or a bridge, and the lighters which sail upon a navigable canal, pay toll in proportion to their weight or their tonnage, they pay for the maintenance of those public works exactly in proportion to the wear and tear which they occasion of them.”

This is not, however, how things were actually done. Powerful business interests have used their political influence since the beginning of American history to secure government funding for “internal improvements.” The real turning point was the government’s role in creating the railroad system from the mid-nineteenth century on. The national railroad system as we know it was almost entirely a creature of the State.

The federal railroad land grants included not only the rights-of-way for the actual railroads, but extended 15-mile tracts on both sides. As the lines were completed, this adjoining land became prime real estate and skyrocketed in value. As new communities sprang up along the routes, every house and business in town was built on land acquired from the railroads. The tracts also frequently included valuable timberland. The railroads, according to Matthew Josephson (The Robber Barons), were “land companies” whose directors “did a rushing land business in farm lands and town sites at rising prices.” For example, under the terms of the Pacific Railroad bill, the Union Pacific (which built from the Mississippi westward) was granted 12 million acres of land and $27 million worth of 30-year government bonds. The Central Pacific (built from the West Coast eastward) received nine million acres and $24 million worth of bonds. The total land grants to the railroads amounted to about six times the area of France.

Theodore Judah, chief engineer for what became the Central Pacific, assured potential investors “that it could be done—if government aid were obtained. For the cost would be terrible.” Collis Huntington, the leading promoter for the project, engaged in a sordid combination of strategically placed bribes and appeals to communities’ fears of being bypassed in order to extort grants of “rights of way, terminal and harbor sites, and . . . stock or bond subscriptions ranging from $150,000 to $1,000,000” from a long string of local governments that included San Francisco, Stockton, and Sacramento.

Government also revised tort and contract law to ease the carriers’ way—for example, by exempting common carriers from liability for many kinds of physical damage caused by their operation.

Had railroad ventures been forced to bear their own initial capital outlays—securing rights of way, preparing roadbeds, and laying track, without land grants and government purchases of their bonds—the railroads would likely have developed instead along the initial lines on which Lewis Mumford speculated in The City in History: many local rail networks linking communities into local industrial economies. The regional and national interlinkages of local networks, when they did occur, would have been far fewer and far smaller in capacity. The comparative costs of local and national distribution, accordingly, would have been quite different. In a nation of hundreds of local industrial economies, with long-distance rail transport much more costly than at present, the natural pattern of industrialization would have been to integrate small-scale power machinery into flexible manufacturing for local markets.

Alfred Chandler, in The Visible Hand, argued that the creation of the national railroad system made possible, first, national wholesale and retail markets, and then large manufacturing firms serving the national market. The existence of unified national markets served by large-scale manufacturers depended on a reliable, high-volume distribution system operating on a national level. The railroad and telegraph, “so essential to high-volume production and distribution,” were in Chandler’s view what made possible this steady flow of goods through the distribution pipeline: “The revolution in the processes of distribution and production rested in large part on the new transportation and communications infrastructure. Modern mass production and mass distribution depend on the speed, volume, and regularity in the movement of goods and messages made possible by the coming of the railroad, telegraph and steamship.”

The Tipping Point

The creation of a single national market, unified by a high-volume distribution system, was probably the tipping point between two possible industrial systems. As Mumford argued in Technics and Civilization, the main economic reason for large-scale production in the factory system was the need to economize on power from prime movers. Factories were filled with long rows of machines, all connected by belts to drive shafts from a single steam engine. The invention of the electric motor changed all this: A prime mover, appropriately scaled, could be built into each individual machine. As a result, it was possible to scale machinery to the flow of production and situate it close to the point of consumption.

With the introduction of electrical power, as described by Charles Sabel and Michael Piore in The Second Industrial Divide, there were two alternative possibilities for organizing production around the new electrical machinery: decentralized production for local markets, integrating general-purpose machinery into craft production and governed on a demand-pull basis with short production runs and frequent shifts between product lines; or centralized production using expensive, product-specific machinery in large batches on a supply-push basis. The first alternative was the one most naturally suited to the new possibilities offered by electrical power. But in fact what was chosen was the second alternative. The role of the State in creating a single national market, with artificially low distribution costs, was almost certainly what tipped the balance between them.

The railroads, themselves largely creatures of the State, in turn actively promoted the concentration of industry through their rate policies. Sabel and Piore argue that “the railroads’ policy of favoring their largest customers, through rebates” was a central factor in the rise of the large corporation. Once in place, the railroads—being a high fixed-cost industry—had “a tremendous incentive to use their capacity in a continuous, stable way. This incentive meant, in turn, that they had an interest in stabilizing the output of their principal customers—an interest that extended to protecting their customers from competitors who were served by other railroads. It is therefore not surprising that the railroads promoted merger schemes that had this effect, nor that they favored the resulting corporations or trusts with rebates.”

Reprising the Role

As new forms of transportation emerged, the government reprised its role, subsidizing both the national highway and civil aviation systems.

From its beginning the American automotive industry formed a “complex” with the petroleum industry and government highway projects. The “most powerful pressure group in Washington” (as a PBS documentary called it) began in June 1932, when GM president Alfred P. Sloan created the National Highway Users Conference, inviting oil and rubber firms to help GM bankroll a propaganda and lobbying effort that continues to this day.

Whatever the political motivation behind it, the economic effect of the interstate system should hardly be controversial. Virtually 100 percent of roadbed damage to highways is caused by heavy trucks. After repeated liberalization of maximum weight restrictions, far beyond the heaviest conceivable weight the interstate roadbeds were originally designed to support, fuel taxes fail miserably at capturing from big-rig operators the cost of pavement damage caused by higher axle loads. And truckers have been successful at scrapping weight-distance user charges in all but a few western states, where the push for repeal continues. So only about half the revenue of the highway trust fund comes from fees or fuel taxes on the trucking industry, and the rest is externalized on private automobiles.

This doesn’t even count the 20 percent of highway funding that’s still subsidized by general revenues, or the role of eminent domain in lowering the transaction costs involved in building new highways or expanding existing ones.

As for the civil aviation system, from the beginning it was a creature of the State. Its original physical infrastructure was built entirely with federal grants and tax-free municipal bonds. Professor Stephen Paul Dempsey of the University of Denver in 1992 estimated the replacement value of this infrastructure at $1 trillion. The federal government didn’t even start collecting user fees from airline passengers and freight shippers until 1971. Even with such user fees paid into the Airport and Airways Trust Fund, the system still required taxpayer subsidies of $3 billion to maintain the Federal Aviation Administration’s network of control towers, air traffic control centers, and tens of thousands of air traffic controllers.

Eminent domain also remains central to the building of new airports and expansion of existing airports, as it does with highways.

Subsidies to airport and air traffic control infrastructure are only part of the picture. Equally important was the direct role of the State in creating the heavy aircraft industry, whose jumbo jets revolutionized civil aviation after World War II. In Harry Truman and the War Scare of 1948, Frank Kofsky described the aircraft industry as spiraling into red ink after the end of the war and on the verge of bankruptcy when it was rescued by the Cold War (and more specifically Truman’s heavy bomber program). David Noble, in America by Design, made a convincing case that civilian jumbo jets were only profitable thanks to the government’s heavy bomber contracts; the production runs for the civilian market alone were too small to pay for the complex and expensive machinery. The 747 is essentially a spinoff of military production. The civil aviation system is, many times over, a creature of the State.

The State and the Corporation

It’s hard to avoid the conclusion that the dominant business model in the American economy, and the size of the prevailing corporate business unit, are direct results of such policies. A subsidy to any factor of production amounts to a subsidy of those firms whose business models rely most heavily on that factor, at the expense of those who depend on it the least. Subsidies to transportation, by keeping the cost of distribution artificially low, tend to lengthen supply and distribution chains. They make large corporations operating over wide market areas artificially competitive against smaller firms producing for local markets—not to mention big-box retailers with their warehouses-on-wheels distribution model.

Some consequentialists treat this as a justification for transportation subsidies: Subsidies are good because they make possible mass-production industry and large-scale distribution, which are (it is claimed) inherently more efficient (because of those magically unlimited “economies of scale,” of course).

Tibor Machan argued just the opposite in the February 1999 Freeman:

Some people will say that stringent protection of rights [against eminent domain] would lead to small airports, at best, and many constraints on construction. Of course—but what’s so wrong with that?

Perhaps the worst thing about modern industrial life has been the power of political authorities to grant special privileges to some enterprises to violate the rights of third parties whose permission would be too expensive to obtain. The need to obtain that permission would indeed seriously impede what most environmentalists see as rampant—indeed reckless—industrialization.

The system of private property rights . . . is the greatest moderator of human aspirations. . . . In short, people may reach goals they aren’t able to reach with their own resources only by convincing others, through arguments and fair exchanges, to cooperate.

In any case, the “efficiencies” resulting from subsidized centralization are entirely spurious. If the efficiencies of large-scale production were sufficient to compensate for increased distribution costs, it would not be necessary to shift a major portion of the latter to taxpayers to make the former profitable. If an economic activity is only profitable when a portion of the cost side of the ledger is concealed, and will not be undertaken when all costs are fully internalized by an economic actor, then it’s not really efficient. And when total distribution costs (including those currently shifted to the taxpayer) exceed mass-production industry’s ostensible savings in unit cost of production, the “efficiencies” of large-scale production are illusory.

Kevin A. Carson


Kevin A. Carson

Kevin Carson is a senior fellow of the Center for a Stateless Society and holds the Center’s Karl Hess Chair in Social Theory. He is a mutualist and individualist anarchist whose written work includes Studies in Mutualist Political Economy, Organization Theory: A Libertarian Perspective, and The Homebrew Industrial Revolution: A Low-Overhead Manifesto, all of which are freely available online. Carson has also written for such print publications as The Freeman.

This article was originally published on FEE.org. Read the original article.

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