Market Urbanism

Liberalizing cities | From the bottom up

“Market Urbanism” refers to the synthesis of classical liberal economics and ethics (market), with an appreciation of the urban way of life and its benefits to society (urbanism). We advocate for the emergence of bottom up solutions to urban issues, as opposed to ones imposed from the top down.

Neither Public nor Private: Rethinking the Dichotomy

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Cato recently kicked off an essay series they’re calling “What Can’t Private Governance Do?”. The series questions how far we can take private governance in replacing public institutions. The most recent essay by Mark Lutter questions where to draw the line between private and public in territorial governance. And, more importantly, whether drawing that line even makes sense. Mr. Lutter concludes that it does, but I’ll politely disagree. We should instead abandon the public vs private dichotomy. It doesn’t accurately describe reality. It’s not useful for understanding policy problems. And it distracts us from the more interesting lines of inquiry we could otherwise be pursuing.

A Tale of Two Cities

Imagine two different cities, one proprietary and the other public. The former is run as a private, for-profit firm. It has an executive team, board of directors, and shareholders. The latter is a traditional municipal corporation. It’s run partially by elected officials and partially by appointees. It’s what we would call non-profit. No one “owns” the government as a legal entity.

Now imagine that both cities raise revenue through land values. Greater demand to live in either city translates into a higher price for land. And the more that either city does to make their jurisdictions attractive, the more revenue that either stands to collect. In this scenario, price signals in the form of land valuations give both cities an incentive to make positive sum investments. Those same price signals also provide both cities with the ability to understand what those positive sum investments might be.

Each city is responding to price information and making positive sum investments. So what difference does it make to call one public and the other proprietary?

In all fairness, there’s still one place we could draw a line. We could make the choice of institutional structure* the defining characteristic. We could say a city with a one-person, one-vote electoral system is public. And a city with shareholders calling the shots is private. But if we imagine a resident owned, for-profit municipal corporation, the institutional distinction quickly breaks down.

Blurred Lines

Thought experiments are good, but real world examples are better. And my favorite one of those is the Hong Kong Metro Transit Railway Corporation Limited (MTRCL). The MTRCL was created as a statutory corporation in 1975 by the City of Hong Kong. And although the City was once the sole shareholder, it sold off 24% of its stake in 2000. Shares of the MTRCL now trade on the Hang Sang index and pay a regular dividend to investors.

The MTRCL is a mass transit provider created by a government entity. But it has residual claimants and returns a portion of it’s profits to shareholders. The hard question is whether it’s a private enterprise or public agency. The easy question is whether we should care (the answer is we shouldn’t).

The MTRCL has created good incentives, confronted knowledge problems, and internalized transaction costs. And that’s what makes it an interesting case study. Both from the standpoint of pure scholarship and for purposes of reform. What’s not interesting is trying to ascribe it a strictly public or private identity. Such an exercise serves no purpose.

Perverse incentives? Let’s make them better. Knowledge problems? Let’s confront our limitations. Transaction costs? Let’s organize to keep social coordination from breaking down. But let’s not become stuck in tired language that does no service to our inquires, our debates, or our efforts to make the world a better place. We can do better.

*Decision making process in Mr. Lutter’s preferred terminology

  • Thanks for sharing, very thought provoking.

  • Ethan Finlan

    Your comment has made me think about the contracting out of mass transit. Generally, these contracts tend to fail because

  • Ethan Finlan

    Sorry about that; it posted before I could finish my thought.

    As I was saying, this article has made me think about the contracting out of mass transit. Generally, contracted operations perform poorly, and I suspect that much of this is due to the fact that the operations are privatized, but the private operators are not residual claimants, in that they do not have the ability to set fares or take a share of the profits (unless I am mistaken about the latter point.)

  • We could make the choice of institutional structure* the defining characteristic. We could say a city with a one-person, one-vote electoral system is public. And a city with shareholders calling the shots is private. But if we imagine a resident owned, for-profit municipal corporation, the institutional distinction quickly breaks down.

    It should also be noted that the one-person, one-vote system is something of a mirage. Elected officials lack the power that a real CEO has, they cannot reorganize departments or fire city government employees. The government is de facto run by the permanent bureaucracy, unelected judges, various “authorities”, etc.

  • somehowacity

    Good post – I agree it’s not often a very helpful distinction, especially at the local level, where the domain of government is more the management of services than anything else. However, I think there are some differences between what is usually considered ‘public’ and ‘private’:

    The first is the ability to break contracts and arbitrarily alter the terms of ‘shareholdership’. ‘Public’ municipalities are frequently empowered, both by other levels of government and by their own declaration, to do things that ‘private’ organizations generally are not – to seize property and determine its use (eminent domain, rent control, zoning) and to reallocate assets amongst its residents (infrastructure planning, always-changing taxation). There is frequently little legal recourse to the ‘contract’ being broken by arbitrary municipal action, even when it changes the rules it itself is governed by. Now, the obvious objection is that this is just what you’ve bought in to; the ‘shareholders’ selected the council/mayor by a vote, and the council/mayor, as ‘board of directors’ approved it – so if you don’t like it, sell or leave, as you would with stock in a failing company. Which is true enough, but is undermined by the second difference: lack of a mechanism for real competition.

    Right now, bankrupt or failing cities are generally taken over by higher levels of government – whoever’s jurisdiction the city falls into. There’s no option for other cities to ‘put in a bid’ if they think they could manage it better, or (usually, at least) breakaways by dissatisfied residents into different models of service provision. It’s like if every city could only have one grocery store chain, and every chain could only open in one city. Yeah, you could move between cities, which is a form of competition, but the ‘public’ arrangement we’re accustomed to keeps well-run cities from ‘expanding’, and prevents poorly-run cities from being reformed, since the municipal government will never ‘cease to exist.’ (Oh, and having to move to a different city to register disapproval of its governance is a good example of an artificial but very high transaction cost.)

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