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Hayek and Cities: Guidelines for Regional Scientists

By Peter Gordon and Harry W. Richardson
University of Southern California
Los Angeles 90089-0626

April 1999

Top I. Introduction

Exit and voice (Hirschman, 1970) have been polar opposites available to urban households when deciding whether to stay in the central city or move out to the suburbs. The relative costs of these choices have been shifting for decades in favor of exit. Increasingly footloose industries have helped to relax many traditional geographic ties. Both greater affluence and growing interest group strength have increased the costs of political and community participation (voice). Reich (1991) is credited with calling attention to a plausible reaction, the "secession of the successful." Interestingly, Wolfe (1998) points out that the propensity to secede is even higher among African-Americans than among other races. The recent explosion in gated and other private communities is an extension of these tendencies.

Many people are moving away from historic urban centers and from traditional forms of governance. These two current U.S. migrations are each a type of exit from traditional political jurisdictions Both migrations circumvent the plans and policies of governments and their clients. As such, they are likely to be the evolutionary winners. In addition, there are good reasons to believe that advances in technology will reinforce both processes, further weakening the hands of state managers. There is also feedback. Failed and unpromising urban policies add to the push forces, accelerating the transitions but also making them more expensive. The major scope for reform then is whether and how to relax the push forces. This is where market-compatible policies can make a difference. In any case, the real story is how society repairs itself.

Hopkins (1996) and Nivola (1998) remind us that even after the fall of the world's planned economies, we should not expect a smooth transition to reduced regulation. There will always be forces that push for more. Consider the regulation of land use. Whereas private arrangements to control land use externalities are quite feasible, indeed the widespread use of covenants has been documented, most were displaced by the emergence of zoning regulations and boards. Why? Several explanations have been offered. Fischel (1995) notes that pro-local government judicial interpretations of the takings clause of the Fifth Amendment of the U.S. Constitution strengthened the hand of local governments. He is sanguine about outcomes where they concern developed properties but argues for increased judicial scrutiny in the case of undeveloped properties. The owner of undeveloped property represents the interests of would-be residents who are bound to be politically weak. "(T)he comparative advantage of constitutional courts in protecting property rights is to intervene when the economic protections of 'exit' and the political protections of 'voice' are attenuated" (Fischel, 1995, p. 5). Fischel is not clear on how or why this division of labor would be enforced. Rather, it is likely that the downside that Fischel admits to, more takings, will continue to pose problems.

A more recent form of interventionism, New Urbanism (Katz, 1994; Calthorpe, 1993), advances a vision of master planning the built environment in the interests of preserving the natural environment, conserving farmland, and promoting nostalgic communitarianism. For example, consider the idea that compact land use arrangements will lead to more pedestrian use and less auto traffic. It is more likely that shorter distances mean lower costs and more travel; fixed trip frequencies are one of New Urbanisms' many unexamined propositions. Yet its greatest shortcomings are that it ignores the two migrations that many Americans are now engaged in, completely misunderstands what motivates them and generally gives their aspirations scant regard.

New Urbanism, as a panacea, is bound to fail wherever it is taken seriously (Gordon and Richardson, 1998b). Rather than attempting to remake our cities into "compact cities", planners should do a few things and do them well. For example, society may decide to purchase selected lands in the path of development. Discovering when and how to do this and with what funds is a big task. Regional scientists can help by paying at least as much attention to institutional infrastructure (Boettke, 1994) as to physical infrastructure. They can clarify matters by suggesting that the market failure arguments that buttress the New Urbanists require a second look, that there are powerful dynamics at work that are beneficial, and that in this light New Urbanist policies may do more harm than good.

Top II. Neoclassical and Austrian Economics Compared

Whereas neoclassical economics describes the efficiency properties of various market regimes, Austrian economics (best represented by Mises and Hayek) elaborates the process by which markets achieve efficiency. The discovery efforts of entrepreneurs (operating in an environment of well-defined and enforced property rights) are central. Austrians advance "the notion of a dynamic market process in which rivalry among participants ensures that knowledge is continually generated and discovered" (Caldwell, 1997). This knowledge can only be gained in the course of market rivalry and is greatly specialized and decentralized; the centralization of knowledge required for socialist economic planning is impossible. Hayek is perhaps best known for his depiction of "spontaneous order", describing how markets and their beneficent supporting institutions are spontaneously organized by free individuals.

In a recent exchange, economists Sherwin Rosen and Leland Yeager contrasted the contributions of neoclassical and Austrian economics (Sherman, 1997; Yeager, 1997). Both perspectives offer unique insights into the role of markets versus the plausibility of planned interventions. Tilting to the neoclassical side, Rosen reminds his readers that the Austrians' "finest hour" was their undoing of Lange's "market socialism" (the "calculation debate", i.e. the idea that planners could solve for a vector of optimal prices and let private decision makers respond to these). Yet this observation has gone largely unnoticed in debates over the relative merits of conventional regulation-based policies (as widely practiced in most OECD countries) as opposed to a "reformed" approach that utilizes market mechanisms (such as externality taxes, tradable rights, contracting, etc.) in order to exploit incentives and decentralized knowledge (compare Banerjee, 1993, with Gordon and Richardson, 1993). Recent contributions by Klein (1998), Staley and Scarlett (1998) and Ottensmann (1998) also advocate similar reforms, but are more optimistic than us about their likely implementation.

Neoclassical welfare economics elaborates the properties of end-states (where all the interesting problems have already been somehow solved) over processes. It ranks end-states, identifies various "market failures" (departures from "perfect" competition) and suggests interventions that would correct them. The analysis of market failure follows naturally from a "straw man" model. Perfect competition does not exist outside of textbooks. Yet, if one omits this obvious fact, it follows as a triviality that interventions are required to correct the failures. Feasibility is usually taken for granted. The importance of dynamic competitive behavior in the absence of perfect competition is an Austrian contribution (Hayek, 1946). Yet most textbooks still repeat something like the 1930s version of the neoclassical approach. Not surprisingly, it is also embraced in many standard courses given to students in various professional schools (including urban planning, public policy and public administration).

Any discussion of market failure needs to be counterbalanced by the concept of "government failure." Governments do not act in the public interest because decisions are taken by public officials who have their own goals, such as increasing agency size and influence, maximizing the number of supervisees, or climbing the bureaucratic ladder. In addition, governments are vulnerable to "rent-seeking" behavior by corporations and others to persuade politicians and bureaucrats to grant them anti-competitive concessions by methods ranging from campaign funds to corruption. Although the concept of rent-seeking postdates the writings of the Austrians, it is clearly consistent with their emphasis on the importance of the process of dynamic, competitive entrepreneurship which would create a market environment in which rent-seeking could not occur.

Top III. Market Lessons

Although its roots are eclectic, regional science gets much of its theory from economics. Not surprisingly, it also taps mainly into neoclassical economics that has always recognized that there are constraints on market operation. So when it comes to policy discussions, it is not unusual for regional scientists to note that markets function "imperfectly" and, as a consequence, governments should intervene. Lal (1996), among others, has noted that: "it is child's play to show that departures from 'nirvana economics' are ubiquitous -- and that 'market failure' (is) the intellectual basis of the planning syndrome" (p. x). Some analysts have searched for possible government failures and try to balance these with any market failures. However, as suggested above, something is missing from the neoclassical story: the lessons of Mises and Hayek who called attention to the fact that even in the world of imperfect markets, market-based prices work hand in hand with an essential division of knowledge. These are the dynamics by which humanity (after escaping the Malthusian Trap, the oil depletion and the related energy shortages scares and other perceived calamities) continues to advance (Lebergott, 1993; Simon, 1996; Cox and Alm, 1998).

If neoclassical thinking is embraced, what is a regional scientist to do with the assertions of the New Urbanism now so prominent in the planning literature? From what we have seen, not much. While "neotraditional" planners are often critical of traditional zoning practices, they simultaneously advocate a raft of tougher controls and broader interventions. Some of its advocates make it a point to enumerate the textbook conditions for "perfect markets" (Nelson, 1998), note that these are not fulfilled, and quickly move on to hair-raising prescriptions such as Urban Growth Boundaries and similar restrictions (Schmidt, 1998). The implications for the operation of urban land markets are horrendous. Portland, Oregon, is a case in point. Ranked 184th out of 187 cities in terms of housing affordability (in the third quarter of 1998; National Association of House Builders data), it is by far the country's leader in terms of house price increases (115.2 percent between January 1990 and December 1998 out of 140 metropolitan areas; First American Real Estate Services data).

Noneconomic normative thinking about cities and space is nothing new. Architects and planners have usually framed the debate. In contrast, many regional scientists' normative ideas remain stuck in the welfare branch of neoclassical economics. "Mainstream" neoclassical economists claim recently to have discovered cities and space ("The Last Frontier", according to Krugman, 1998). Yet, by still omitting discussions of the various spaces that define cities (e.g. their centers, suburbs and exurban areas) they have very little to say about New Urbanism or other contemporary planning themes (Gordon and Richardson, 1998a). A recent interesting but flawed paper by Glaeser (1998) is a case in point. The author uses city (metro area) size as a key explanatory variable. He settles on PMSAs (Primary Metropolitan Statistical Areas) as the appropriate unit of measurement and identifies various city size elasticities (with respect to commuting time, air pollution, trust, happiness, etc.). Finding that "the connection between city size and commuting time has been declining slightly over time," (p. 151) but noting that the aggregate costs of commuting will increase as the value of time grows, he looks for offsets in the form of better technology and congestion pricing. Unfortunately, the real spatial story is still missing. Most analysts now agree that as there is a continuous growth in suburb-to-suburb commuting and that average travel speeds rise to offset greater distances. Suburbanization is a traffic "safety valve". Settling on the PMSA definition of cities and leaving out the outer suburbs obscures this important point. The worst traffic is in the densest cities, undermining a key New Urbanist position, and diminishing one more "market failure". This spatial accommodation is made possible by market flexibility and fewer barriers. It is, therefore, also a dynamic accommodation that would not surprise Hayekians. Of course, there is an ongoing debate about the extent to which space matters, but regional scientists have the best experience in addressing this issue. The combination of assessments of spatial relevance and Hayekian competition is powerful.

The idea of market-friendly public policy is not new. Welfare economists since Pigou (1921) have pointed to opportunities for policy makers to "get prices right". Other "optimal" policies have focused on the introduction of new markets such as for emissions trading (Jorgenson, 1997), trading water rights, transfers of and/or payments for development (or conservation) rights. Closely related to all this is the idea of "rational policy analysis" (Quade, 1982). These prescriptions, however, have not confronted the problem that planners' incentives may point them in different directions. Many of the suggestions of the policy reformers are undermined by the public choice view (incentives) and by the Austrian position (knowledge). Where does this leave "market planning"? Indeed, Wegner (1997) asks whether the evolutionary market processes described by Hayek "offer policy makers any leeway for design?" (p. 487) and "(c)an we imagine a successful policy of interventionism at all if we assume both decentralized knowledge of market participants and an evolving economy?" (p. 492). Does this imply that there is no role for policy analysis? Analysis by regional scientists could be more useful if their point of departure was an understanding of the powerful dynamic forces that shape society rather than the "child's play" of discovering market failure.

Interventions of any stripe are no match for Hayek's notion of "spontaneous order," the discipline of a highly decentralized market under a well-defined set of laws and rules that permit order to emerge. This "emphasizes the positive task of liberal legislation in providing an appropriate institutional framework for market competition and cultural evolution" (Vanberg, 1994, p. 198). More than markets that may attain some Paretian state, these processes describe "how human societies provision themselves through time" (Mayhew, 1997). Successful behavior and institutions are constantly being selected. Some powerful contemporary trends can be seen in this light. For example, as suggested above, many Americans are now moving out of harms' way into private communities and/or into outer suburban and rural areas. These outcomes clash with city planners' New Urbanism that advocates radical restrictions on markets so that more "compact" patterns of urban settlement (e.g. via core city infill development) might emerge. Affluence and technological advances are making the two migrations feasible for increasing numbers of people. Unsuccessful and uninspired policies contribute by adding to the "push" forces. New Urbanists are ironically and unwittingly part of the problem that they bemoan rather than the solution. Moore's Law, even faster bandwidth growth, and the networked economy accelerate the whole process. It is better to understand Hayek's dynamics than static models of market failure.

Top IV. City Planning and New Urbanism

Writing about his own archeological quest in search of how urban America works, Garreau notes that his discovery "was a challenge to everything that I had been taught: that what this world needed was More Planning; that cars were inherently Evil and that our attachment to them was Inexplicable; that suburbia was morally wrong, primarily a product of White Flight; and that if Americans perversely continued to live the way they have for generation after generation, it couldn't be because they liked it; it must be because They Had No Choice. I even thought that cities were built by Master Architects" (Garreau, 1991, p. xx). One need not look far to see that such largely unexamined views are staples. As Hayward (1997) observed: "The car is rapidly becoming the ultimate Rorschach test of political and social attitudes." Most thinking on these lines is now embellished in New Urbanism and its recommendations of the "neo-traditional" design of communities and neighborhoods. New Urbanist advocates claim that these designs would benefit the natural environment, reinvigorate the "public realm," restore a "sense of place" and solve a myriad of social problems. Many New Urbanists see themselves as part of an ideological, almost a religious, movement. It is driven by a Congress for New Urbanism, a closed group of architects, planners and journalists, which published a utopian Charter in 1996. It has no place for the choices of the people who are the objects of planning. Rather, it proposes to vest great powers in their own kind, the New Urbanist designers, architects and planners. In addition, it suggests that it is a relatively simple matter to remake the world, accurately described by David Harvey as "spatial determinism."

New Urbanist advocates deride most of the residential developments that are put on the market as the product of overly restrictive U.S. zoning and building codes. In so doing, they overlook widespread low-density development outside this country. More leafy suburbs with better quality schools and more political power (for those who want to be involved) are flourishing around more cities all the time, simply because this is what most people want. It is not clear that the neo-traditional communities that have recently been built are passing the market test (Pollan, 1997). Were it so, it is likely that at least some competing developers (and some competing communities and zoning boards) would scramble to meet the demand. Many others would follow, if successful. Where they have been "successful," they are turning out very elitist communities with very expensive property values (e.g. Seaside, Florida; Garvin, 1998, or Celebration, Florida) that make the social mixing goals of New Urbanism a joke.

Nevertheless, lawmakers in several states have adopted much of the New Urbanist position, arguing for statewide land use planning, urban growth boundaries, concurrency arrangements, and other instruments to promote compact development. All of this regulatory activity is occurring at a time when markets appear to be winning in most other sectors of the economy, both local and global.

Top V. Contemporary Patterns of Human Settlement

Rybczybski (1995) is among the latest in a long line of observers to ask: Why are North American cities not more like Paris? The author admits that "(c)hanges in North American cities are often the result of what economists call market forces, a reminder that our cities are shaped not only by planners but often by the idiosyncratic decisions of large numbers of separate citizens" (p. 30). There is much more of this than he appreciates. Markets are ascendant at home and abroad. The increasing mobility of labor and capital between cities, regions and countries has been widely discussed. Governments must compete more than ever; there are limits to rent-seeking. McKenzie and Lee (1991) attribute the demise of communism and other forms of statism around the world to these new facts of life.

While cities have been suburbanizing for many decades (Manhattan's population peaked in 1910), Garreau (1991) gets much of the credit for calling attention to a key attribute of modern urbanization, what he chose to call "Edge City: Life on the New Frontier." He begins with: "The controversial assumption undergirding this book is that Americans are basically pretty smart cookies who generally know what they're doing. ... (I)t is further assumed that this good sense is especially evident when Americans cussedly march off in precisely the opposite directions from those toward which our elders and betters have been aiming us." (p. xix).

Our own work elaborates this discussion in two directions. First, using the example of Los Angeles, we have demonstrated that development now moves outward from metropolitan subcenters, just as it once did from the traditional city center. In 1990, more than 88 percent of the metropolitan area's jobs were outside any of the region's nineteen activity centers, up from 80 percent in 1970 (Gordon and Richardson, 1996). The levels and the trends suggest increasingly generalized employment dispersion.

Our second finding is that since 1989, most U.S. job growth has been outside metropolitan counties. During this "rural rebound," the 1989-1995 average annual growth rate for metropolitan area private sector jobs was 1.42 percent; the rate for the nonmetropolitan counties was 1.99 percent (Gordon, Richardson and Yu, 1998). This contrast is proportionately somewhat greater than during the celebrated "rural renaissance" of the 1970s (1.98 percent as compared to 2.57 percent). Also, metropolitan growth is overwhelmingly occurring in the outer suburbs. Much of the nonmetropolitan growth is just beyond the Edge Cities, although some of it is in nonadjacent rural areas.

Both results point to the same conclusion: agglomeration economies are now spread over larger geographic spaces. This is consistent with the fact that the costs of transportation and information exchange continue their long decline, dramatically more so in recent years. More "footloose" industry means that the location decisions of households now lead firms, in contrast to the long-standing imperative for workers to locate their homes in the vicinity of industries that once had limited spatial mobility. The scope for residential choice is now much wider and still growing. This is, therefore, an inopportune time for imposing urban growth boundaries. Spatial settlement is rapidly accommodating to new technologies. Easterlin (1996) summarizes the dramatic effects that technological advances have had on living standards since the middle of the eighteenth century. The much greater variety of residential choice is the latest bounty from this process.

Top VI. Private Communities

Of the two migrations that have been prominent in late-twentieth century America, the movement of people and jobs into the outer suburban, exurban and rural areas and the relocation of households into private communities, the latter has received the least attention. But it has been labeled "the most significant privatization of local government responsibilities in recent times" (cited in McKenzie, 1994, p. 178). Both movements can be seen as parts of the latest spontaneous social order to defy (via Hirschman's exit option) the plans of visionaries and politicians. Many people are choosing social and political as well as spatial arrangements beyond the planners' reach.

Suburbanization and exurbanization have already been explained. The parallel move to private communities is less well understood. McKenzie, for example, suggests that "(l)ocal tax revolts and reduced federal aid to cities coincided with a deliberate shifting of responsibility for many social and regulatory matters from the national level to state and local government. The result, for many cities, was the specter of budget deficits and potential insolvency. At the same time, the administrations of Presidents Carter, Reagan and Bush promoted, subtly or explicitly, an existing popular dislike for government." (p. 178). In other passages, McKenzie alludes to private developers who "gradually transferred local government functions to private corporations" (p. 180). All these explanations beg the question. Why were taxpayers in revolt? Why did they come to dislike government? Why did developers do what they did? Government performance and ensuing perceptions of what was taken versus what was gained must have played a role. Many public schools, for example, came to be identified more with forced busing, dilapidated buildings, pitiable facilities, drugs and violent crime and less with academic excellence.

At the same time, land use decisions at all levels of government (often driven by environmental concerns) pose a growing "takings" threat to property owners. Hopkins (1996) has shown that even though there have been major deregulatory moves by the federal government in recent years (airlines, natural gas, telecommunications, rail, trucking, etc.), there has been a net increase in regulation mainly because of new environmental controls. Nivola (1998) also sees a broad "new pork barrel" that is "off the books" in the form of mandates and regulations, with a bill approaching $700 billion. Epstein (1985) concludes that property owners now have reason to fear the prospect of having their real estate assets placed in a common pool. Property-based voting in private communities could then be seen as a reasonable defensive measure. Developers have discovered that by selling governance opportunities, they are satisfying a profound consumer demand (Boudreaux and Holcombe, 1999).

MacCallum (1997) reminds his readers that Spencer Heath, predating Tiebout by more than 20 years, pointed out that " public services, the things that we enjoy in common rather than separately and apart from one another, things such as streets, public safety, and other community amenities, are supplied to sites rather than to individuals, and individuals gain access to them through their occupancy of these sites. Thus owners of land, when they lease or sell sites, are the market purveyors of public services. Only thus can such services be distributed, as other goods and services are, through the conventions of the market place. Only through property in land can they be freely and equitably administered by contract." (1997, p. 292). It is not implausible for developers to go to the next step and produce as well as distribute these services. Their reward would be more market power (Foster, 1997) and higher incomes from enhanced land values. Why not, since the alternative, the imposition of developer impact fees by local governments, means that they would be paying for them in any event. The widespread historical occurrence of such arrangements has been documented by Beito and Gordon (1999). They are now being revived in all sorts of "entrepreneurial communities". MacCallum cites the shopping mall: "Fifty years ago it was experimental; fewer than a dozen existed in the United States, and even the name had to be coined. Today there are over 40,000. Moreover, each now supplies for its tenants a significant portion of the community services formerly provided exclusively by local governments, services such as paving, streets, sewerage, parking and security" (pp. 293-4). Malls, of course, are evolving all the time into "invented streets", entertainment centers, and much more

MacCallum believes that proprietary community associations will dominate the future of human settlement, replacing political administration. "The broad picture I envision ... is one in which financially self-sustaining communities will have become the norm, entrepreneurial enclaves with leaseholds instead of subdivision lots as the tenure of choice for commercial and residential uses alike. All taxation and burdensome licensing, regulation and other restrictions on enterprise will belong to the past. The state will have withered away" (p. 296). The author emphasizes the distinction between subdivisions with owners' associations and entrepreneurial communities. The former "is a policing arrangement organized to enforce the restrictive covenants in the deeds. The entrecom on the other hand seeks to foster an attractive living environment that will draw new patronage and keep its existing patronage ... In the one the residents are quite literally subjects ... In the other they are customers. The owners' association seeks compliance and must be rigid; the entrepreneur seeks patronage, and therefore must be flexible and accommodating" (p. 298). Interestingly, for-profit operation is offered as a greater safeguard against arbitrariness than even property-based voting. In addition, "it brings an entrepreneurial dynamic to the provision of public services that is wholly lacking in subdivided communities" (p. 298). These benefits will compete with the well-known attractions of privately owned land.

Like MacCallum, Foldvary (1994) notes that there are no public goods, only territorial goods. The evolution of spontaneous order to allocate these efficiently is very plausible from the Austrian perspective. The author calls attention to relatively new arrangements and trends that point to the "purely voluntary city, based on neighborhood associations, in which all governance is voluntary and contractual. ... Ultimate power in a purely voluntary city would be completely decentralized, down to the individual household and family. Its governance structure would be bottom-up, power ultimately based on sovereign individuals. The distinction between the government and private sectors would disappear, as voluntary governance would be based on contracts among private members and property owners" (1997, p.1). This idea goes far beyond Tiebout, whose model was based on the idea of clubs, a concept that assumed some homogeneization of preferences. Instead, it reproduces in a quasi-governmental context the decentralized market behavior that Hayek and Mises found in commodity markets.

Top VII. Conclusion

The arguments of this paper are simple. Those regional scientists trained in economics need to return to their roots, but in a revised form emphasizing the virtues of dynamic competitive behavior in a decentralized setting (the Austrians) rather than the defensive posture that admits a wide range of market failures (neoclassicism). Only this approach can enable them to challenge the proliferation of local mandates and regulations in an era when higher-level controls are withering. This would permit an effective challenge to the outdated social engineering of the New Urbanists. It would also permit recognition of the fact that the dual migrations, to suburban/exurban areas and to private communities, is a market adjustment to be embraced rather than to elicit hand-wringing. By exercising these exit options, households are far ahead of the planners' game. In regional planning too, the spontaneous order remains powerful and real.

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