Why Not Sell Cities?

Economists don’t like seeing economic inefficiency, and there’s a lot of it out there to bother us. But some of the very worst we see is in cities; there are many incredible inefficiencies in city land use and in supporting utilities. Which of course makes economists wonder: how could we do better?

Here is one idea that should seem obvious to most economists, but even so I can’t find much discussion of it. So let me try to think it through. What if we auctioned off cities, whole?

Specifically, imagine that we sell all the land and immobile property in an urban region, including all the municipal property, plus all the rights to make urban governance choices. We sell this to a single buyer, who might of course be a consortium. The winning bid would have to be higher than the prior sum of all regional property values, plus a gain of say 50%. The money would be paid to all the prior property owners in proportion to prior property values. (“Prior” should be well before the auction was announced.)

The winning buyer would control all property and governance in this region for a specific time period, say twenty years, after which they’d have to divide the region into at least a thousand property units and auction all them off again individually. Urban governance would revert back to its previous system, except that there’d be a single up-or-down vote on one proposal for a new governance regime offered by this buyer, using previous rules about who can vote in such things.

The idea here is of course to “internalize the externalities”, at least for a while. This single buyer would encompass most of the varying conflicting interests that usually cause existing inefficiencies. And they’d have the power to resolve these conflicts decisively.

OK, now let’s ask: what could go wrong? Well first maybe no bidder could actually collect enough money to make a big enough bid. Or maybe the city inefficiencies aren’t big enough to produce the 50% added value requirement. Or twenty years isn’t long enough to fix the deep problems. Or maybe the plan leaks out too early and pushes up “prior” property values. In these cases, there’d be no change, so not much would be lost.

Another thing that could go wrong would be that larger units of government, like states or nations, might try to tax or regulate this single buyer so much as to take away most of their gains from this process. In expectation of this outcome, no one would bid enough for the city. And again there’d be no change, so little would be lost. So we should try to set this up to avoid such taxation/regulation, but knowing that the downside isn’t terrible if we fail.

Finally, the new city owner might price-discriminate against residents who are especially attached to the city, and so are especially unwilling to leave. Like an old couple whose children all live nearby. Or a big firm with an expensive plant located there. If the new owner cranks up their rent high, these folks might lose on net, even if they are paid a 50% bonus on property values. Of course one might try to set rules to limit price-discrimination, though that might create the over-regulate scenario above. Also, if selling off cities whole became a regular thing, then people may learn to not get too attached to any one city.

I don’t see any of these problems as overwhelming, so I’d endorse trying to do this. But I don’t actually expect many places to try it, because I think most voters whose support would be needed would see their status as threatened. They’d be offended by the very idea of a single powerful actor having strong control over their lives, even if that actor had to pay dearly for the right, and even if they end up better off as a result. So I’d guess it is pride that most goeth before our city falls.

As I’ve mentioned before, people tend to love cities even as they hate firms, mainly because firms tend for-profit, while cities tend democratic. People now mostly accept for-profit firms because the non-profit ones don’t offer attractive jobs or products. Similarly, I’d predict that if there were many for-profit cities most people would be okay with them, as they’d be reluctant to move to worse-run non-profit cities. Also, if almost all firms were non-profit, people might be reluctant to rely on for-profit firms due to their bad public image. Multiple equilibria are possible here, and we may not be in the best one.

Added 9p: Many commentaries seem to fear private city owners evicting undesirable people from the city, in contrast to democratically controlled cities which they see as fountains of altruism toward such people. But see here, here, here, or consider that democracies regularly vote to exclude immigrants who would in fact benefit them materially.

Added 9a:

At the state and local level, government is indeed engaged in redistribution — but it’s redistribution from the poor and the middle class to the wealthy. (more)

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    About the price discrimination. Won’t that just end up working like it does with private schools: “difficult” people are kept out, but these people still need to live somewhere so they go to government run cities which become more expensive to run as a result. This then works like a self-fulfilling prophecy of privately run cities looking more and more efficient compared to government-run cities, externalities will simply stay external.

    I think the biggest reason people are against privately-run cities is that the city management would not be accountable or in any way agree won things with the population, as well as that people can’t just simply move if it’ll give them $10.000 in their pockets: new jobs, schools, homes and friends have to be found.

    • sflicht

      Mildly off-topic, but since you mentioned private schools. Russ Roberts did an amazing EconTalk interview on private schooling in the developing world that is well worth listening to. http://www.econtalk.org/archives/2014/12/continuing_conv_32.html

    • Difficult people cost more to those around them, and they *should* be charged more, in order to induce them to find the most efficient set of associates. It is places that don’t charge them more that are the efficiency problem.

      • IMASBA

        The problem with your reasoning is that difficult people are usually precisely the people who cannot afford to pay more. If you were to let them die in the desert then your system could work (or perhaps not, after all, efficiency can always be increased by stretching the definition of a “difficult” person until only the executives and major shareholders of the private city are left), otherwise you’re just shifting the problem.

        Modern welfare states were built on the idea that some damage to the average efficiency/utility is acceptable to limit the variance of that utility to some degree. Like most economists you seem to lose yourself in the averages without looking at the variance (so what it’s like for the individual).

        As the saying goes: if you have your head in the oven and your feet in the freezer you’re doing fine on average…

        Now don’t get me wrong, I’m no communist but you can’t just have a profit-driven government without accountability to the population and difficult people are simply part of the world and will remain so unless you want to be responsible for their deaths.

      • Do you really think that the reasons voters don’t vote today for city policies to keep out difficult people is that they are altruistic?

      • IMASBA

        The reason is that they’re afraid they might one day be considered difficult people themselves (the “first they came for…” argument). It’s similar to the ban on murder, you can be the least empathic person in the world and still want murder to be illegal, simply because you don’t want to be killed yourself.

      • sflicht

        It’s a bit un-PC, but I’ll put this out there anyway. Lets consider a quintessential example of a “difficult” subpopulation of an urban area: drug-addicted, homeless residents of the Tenderloin district in San Francisco. Consider a potential policy intervention: use local homeless shelters and addiction treatment centers to identify the target population, and give each of them something like $25,000 on the condition that they move to North Dakota and get a job in the fracking industry. (For the sake of argument, let’s suppose we ignore the substantial subpopulation that is suffering from severe, non-addiction-related mental illness.) I think many people have the intuition that this intervention would be inhumane. However, I also think it might very well be a Pareto improvement upon the status quo, i.e. both the target population, the other residents of SF, and North Dakota employers would see substantial utility gains, and everyone else would be indifferent. My point in making this comment is simply that these two intuitions are in tension: if it is a Pareto improvement it is probably not inhumane. It also probably isn’t substantially more expensive than other conceivable “solutions” to the problems posed by “difficult” residents of urban areas. Just putting this out there as food for thought. (I.e., I’m not explicitly endorsing this policy proposal; it’s just a thought experiment.)

      • dlr

        The problem of course is that the day your policy is reported in the press, SF becomes the drug addict/homeless person magnet of the entire country. Heck, a lot of people would be better off to quit their jobs and live on the street for a few months if they made $25,000 on the deal. If I was making minimum wage in San Antonio, I’d say, ‘hey, it’s time to jump on a bus and make $25,000.’

        This is the dane-geld problem. Although I would think it would work for a pre-defined population.

      • sflicht

        To be clear, I was not putting forth the thought experiment above as an actual policy proposal. It was merely meant to illustrate that the moral considerations surrounding policies designed to deal with “difficult” people in society are in fact rather subtle. Moreover our moral intuitions about these policies cannot always be trusted (at least if one also tends towards a consequentialist view of ethics). The point was to challenge IMASBA for the moral high ground with respect to the impact of Robin’s privatized city proposal upon the most disadvantaged members of society. That is, I do not concede that the privatization proposal necessarily loses out to conventional democratic city governance, even if your theory of distributive justice is something like “maximin” (maximizing the well-being of the worst-off members of society). Without putting words in his mouth, I *think* IMASBA was suggesting something along these lines, that I was trying to push back against.

      • IMASBA

        You sound as if those are new ideas. In reality rehab doesn’t work for a majority of cases and the “severe non-addiction-related mental illnesses” form quite a large portion of the group of “difficult” cases (not surprisingly really since our usual definition of mental illness is a personality trait that makes people difficult to live with for others). Government have tried things like you suggest here but found there are no easy fixes. Some countries have far less of these problems but that’s because they spend colossal amounts on (preventive) social welfare, probably significantly more than it would cost to just lock people up, so in Hanson’s view that would be inefficient.

      • IMASBA

        What it comes down to is that a lot of government waste is “fundamental” (you have to have it if you don’t want to turn schizophrenics into soylent green, after all, government can’t externalize) and that efficiency =/= utility, at least not for everyone, probably not even a majority. Hanson proposes to optimize matters for the group of people whose utility does very closely align with a higher-than-we’re-used-to (even in Scandinavia, because they too do not have privatized cities) economic efficiency of government but I think he’s being overly optimistic about how large a group of people that is, or he simply does not think the other groups should exist.

        If I, as an able bodied, productive citizen derive utility from knowing there are social programs out there for the less fortunate and that also meaning every street out there is basically safe for me (which is true in my country) then that should be respected. You can’t just come and tell me I should really derive my utility from paying less taxes inside of some sanitized gated community.

    • JW Ogden

      Won’t that just end up working like it does with private schools: “difficult” people are kept out, but these people still need to live somewhere so they go to government run cities which become more expensive to run as a result.

      Cities today drive out difficult people with minimum building codes, loitering laws, drug laws, zoning, slow growth policies, etc. Perhaps for profits would allow more building of residencies because it could lead to more profits.

  • sflicht

    I looked up a few numbers. The top 5 corporate cash holders are all tech firms (AAPL, MSFT, GOOG, CSCO, ORCL); they have roughly $500B, and this number has been increasing at quite a clip (from news articles, I’d estimate 5-10% annually?). The total value of Manhattan real estate is roughly $1T. So I’d say it is certainly plausible that a tech consortium would have the necessary liquid assets to purchase San Fransciso at a 50% premium within a decade. (They could always issue debt to raise funds as well.) I think, however, that to overcome political opposition, something more like a 100% premium would be required, with some fraction of the premium redistributed progressively, and probably restrictions as to how rental property is managed for the first N years of the 20 year lease.

    My guess is that installing new road infrastructure to support self-driving cars, and banning human-operated vehicles in city limits, is the most likely near-term situation where purchasing a city could offer ROI. The consortium could anticipate revenue streams from operating the automated vehicle fleet, as well as appreciation in the value of the city as a result of increased economic efficiency. The possibility of this as an investment opportunity is of course contingent upon the state and federal regulatory landscape. But there’s some reason to be optimistic that will fall into place within a decade. It’s also contingent upon reluctance on the part of city government to undertake the necessary disruptive infrastructure and legal changes. But cities like San Francisco and Berkeley would in fact likely be reluctant to do this, for political reasons.

    Could a city like Mountain View or Palo Alto be a more likely fit? I doubt it, because I’m not sure the economic gains would be quite as great in the less-densely populated cities of Silicon Valley. On the other hand, if they purchased *all* the cities and towns on the Peninsula, the gains might be quite great, because they could build a self-driving-car-only alternative highway, making the 101 obsolete. That could potentially be quite a good investment.

    • Yes doing the entire urban area of the Calif. bay area as a unit would be the ideal. And yes the temptation to overtax the gains would probably kill it.

      • dlr

        There’s two problems I see here. One is, that there are so many financial advantages to owning your own home, that you wouldn’t be able to attract/hold the kinds of people you would really want as city residents if they were forced to be renters. People who are smart enough to recognize the financial advantages of home-ownership; and stable/hardworking/talented enough to save the down payment; aren’t the kind of people you want to drive away.

        The place to try this wouldn’t be someplace that is working fairly well, like (comparatively speaking) the bay area, but someplace that is in total failure mode, like one of the failing cities in the rust belt. A lot of places like that already own the majority of the property inside city limits — it has been abandoned, condemned for back taxes, etc. I read somewhere that 9 out of 10 properties in the entire city of Detroit (?) had been abandoned and were now owned by the city. This would eliminate the need to force solid citizens/homeowners to sell their homes, which would make the whole thing much easier to get approved (and decrease out-migration of the kinds of solid citizens you want to attract, not drive away). You would make your money by selling the condemned property, piece by piece, after you’d cleaned up the worst of the pathologies.

    • dlr

      I don’t think you’d make any money buying Mountain View or Palo Alto. They are already well run. The only places where you could reasonably make money is where there are large swaths of slums that need re-developing. Those are filled with renters (or squatters), so they would have no incentive to vote yes to a buy out. For renters you’d have to make the pitch as being $x to each REGISTERED VOTER. After all, what you would be doing is BUYING THEIR VOTE for the next twenty years.

    • IMASBA

      If consortiums can regularly scrape together $1tn in the near future then it’s only a matter of time before they become nuclear powers and start ignoring such nuissances as taxes and regulations…

      In any case it would be interesting to see if governments still can control corporations that own cities with millions of residents. Perhaps only a world government would be powerful enough.

  • Jim Benz

    You “think most voters whose support would be needed would see their status as threatened”? Because the idea of tyranny by the highest bidder isn’t reason enough to oppose this idea? I imagine some would see this as an example of innovative thinking, but–speaking as someone who is very attached to the city in which I live–sacrificing democratic government to the ideological gods of efficiency and private ownership is utterly ridiculous. Even if, as a property owner, I make a profit on the forced sale of my property to a totally unaccountable consortium of wealthy owners. Do you really think renting my own (former) property in lieu of property taxes will be a better deal? Or, for instance, that the new owners will make a more efficient use of my city’s extensive park system in a way that better benefits the residents as a whole? Probably not, as working toward the public good might not be considered (by some) as the most efficient use of prime real estate.

    Maybe I’m being too pessimistic, buy this sounds more like a libertarian fantasy than a real solution to urban problems. Why don’t we just sell the whole country to a consortium of oligarchs and be done with it? Or is it only city-dwellers who deserve this dystopian suspension of democratic self-rule?

    • We should start small with such things, but yes selling off entire nations would be something to consider if city selling worked out well. And it sure does seem like you’d see living in such a city as lowering your status, even if your material conditions improved, as you see people who live under “tyrants” as lower status.

      • Jim Benz

        If by “losing status” you mean forfeiting my right to representation in municipal government, I guess you’re correct; I’ve just never thought of voting rights or democratic government as having anything to do with individual status. In fact, most of us probably consider those rights to be sacrosanct, with equal status for each voter. But you, as an economist, would be willing to forfeit voting rights and self-governance because inefficiency is economically troubling? Wow.

      • Yes, for me voting rights are only instrumental, valued as a way to get other things. I don’t value them directly as a symbol of my status and worth as a human being.

      • Jim Benz

        Why do you consistently define this as an issue of status? What about accountability? Do you really have such faith in market forces that you’d surrender democracy for the mere potential of benevolent tyranny? That seems almost absurd.

      • Jim Benz

        Correction: Totally absurd.

      • sflicht

        I’m genuinely curious: when was the last time you voted in a municipal election feeling like you had a genuine stake in the outcome? Did your vote make a difference? Did your preferred outcome prevail, and was the reason for that a matter of optimal policy or well-executed lobbying by beneficiaries of your preferred policy outcome?

      • Peter David Jones

        Privatisation of cities is something we should cconsider if privatisation of utilities worked well, As it happens, the results have been extremely mixed, and it seems the exact terms and details of the owners are and are allowed to do are extremely important. So no, its not a case of just leave it to an auction.

    • This is a libertarian dystopia, not fantasy.

      • I agree that my proposal violates axiomatic libertarian principles, so axiomatic libertarians won’t want to endorse it.

      • Jim Benz

        I was going to say dystopia, but the optimism of this post makes it, in my mind, pure fantasy.

  • ckp

    This is an appalling idea. Society is atomized enough as it is without bringing in the possibility of having your entire life uprooted at short notice by some big corporate actor. You’d have to find a new home, new job, new friends, probably be separated from your family, every time a city changes hands. All this uncertainty would have a tremendously unhealthy psychological effect, and discourage people from forming strong, long term social bonds.

    • ckp

      As for why people like cities more than they like firms – shouldn’t it be obvious? Cities are where people live their whole lives – they are born, raised, go to school, get a job, fall in love, break up, fall in love again, marry, have kids, grow old together, and die. All the emotional ups and downs are relative to the full range of social interactions (familial, transactional, relational), all against the backdrop of living spaces, public places, restaurants, churches, and so on. Thus, the city gives its own unique flavor to people’s lives.

      Social interactions in firms are mostly transactional in nature, and otherwise much more limited in scope – roles are limited to things like manager, director, employee.

    • You know that democratic city governments also make decisions that “uproot” people too, right? You might be arguing that firms tend to create more change than do city governments, and that change is bad. But I think you are actually just more offended by change that comes from a profit-driven actor, relative to change that comes from democratically elected actors.

      • ckp

        Yes to both, I don’t see why either are bad reasons, in this context.

      • sflicht

        It seems to me some of the backlash against this idea is related to Hirschman’s theory of exit and voice. The primary way residents of democratically-managed cities respond to poor governance is voice (protest, voting, town hall meetings, etc). Some commenters appear to think that residents of a privately-run for-profit city could only respond to bad city governance via exit. This would indeed be a concern if it were true, because leaving one’s home is very expensive (emotionally and financially) and therefore unpleasant. But firms respond to voice as well. The notable exception of Google aside, most firms invest enormous resources into customer relations, assessing that their customers’ exit is even more costly, on average, than responding to their customers’ voiced complaints.

        On the other hand, some concern seems valid. If we think of a private city as Facebook, are the residents of the city customers (advertisers) or product (eyeballs)? Perhaps more the latter.

      • Peter David Jones

        Firms respond to Voice where customers can plausibly switch suppliers.

      • I’m not offended by change from a profit-driven actor; far from it. I am offended by uprooting people coercively, regardless of whether a democratic or for-profit entity does it. The solution to democratic entities doing it isn’t to allow for-profit entities to do it, too; nor is it a justification. The solution is stopping both from uprooting people, as well as allowing both to compete.

        As I said above, I’d much rather have municipal corporations and cities treated as actual corporate entities, with defined powers (so some cities can have more powers than others, but it doesn’t violate rights because you have to voluntarily sign up to be subject to them), and subject to bankruptcy, purchase, and so on. A sale, then, is a sale of the powers and property of the city, but not of the residents’ property.

  • Anonymous

    One problem with this is that a city-owner could increase his property’s value by by forcing externalities on others, outside of the city. If I was a city owner that wanted to make my property more valuable, I’d just try to push out all of the undesirable residents.

    • What is your theory for why residents don’t vote to do this in cities today? Voters are all altruistic helpers today?

      • Voters are surely more altruistic than corporations. [When you discuss ideological questions, you drop all considerations of degree.]

      • Surely? Voters are often spiteful, hurting themselves so that they can also hurt others. Consider refusal to allow more immigration, which would mostly benefit locals. Firms at least aren’t as spiteful.

      • IMASBA

        You are again too lost in the averages to see the variance. More immigration benefits locals, on average, at least in a monetary sense (whether it even benefits their average utility is doubtful). But people don’t care about the average, if the gains don’t reach them and that’s completely rational. Would you give up your, say, $50k a year income if it meant some billionaire would make $100k per year more? I don’t think you would, unless you got a >50k a year cut from that extra profit (but you won’t, even if the rich paid a very high effective tax rate, it would all be spread out among many people so it just would not be worth your while). This theme keeps returning in your ideas (including this privatized cities one) and those of many other economists.

        Taxes on the rich are typically too low to spread out average gains evenly and even if that were not the case there’s still the fact that the losses are usually not spread out in the real world (instead of every worker losing some tiny amount, perhaps to be compensated via taxes on the rich, a subset group of workers loses everything and no one wants to be them so everyone, except the rich, resists the change that would increase average income).

      • I think it’s a pretty sure bet that the far-mode values of most voters tend more to altruism than spite, whereas corporations function in accordance with near-mode interests.

        It’s a bit a slur on citizens to think that anti-immigration sentiment is powered by spite. [They are, after all, your fellow conservatives.]

      • Christopher Chang

        That’s a terrible example. How do you explain the difference in level of resistance to e.g. Indian and Chinese graduate student immigration vs. unskilled people crossing the southern border? Under a wide range of definitions of “top achievers”, kids of those in the former cohort are represented at literally ~100x the rate of kids of those in the latter cohort, even though China and India both have lower per-capita GDP than Mexico. Unless you are willing to claim that these top achievers do not tend to create more positive externalities for typical Americans than unskilled immigrants do, it seems clear that the relatively high level of American voter support for Indian and Chinese grad student immigration is compatible with enlightened self-interest and incompatible with spite.

        (There certainly are voters motivated by spite, but they are a minority that can be safely ignored; immigration liberalization’s political troubles are rooted elsewhere.)

      • sflicht

        Consider a recent controversy in urban politics: whether police adopt the correct degree of force in dealing with nonviolent criminal offenses like selling loose cigarettes. I would argue that democratic city governance is the main reason why many cities’ police departments pursue policy approaches that are (perhaps) locally optimal, but are certainly not globally optimal, from the point of view of general social welfare. Namely, police lobbies enjoy undue influence in local politics because their members serve a vital public interest and thus command substantial voter support, yet their views are not well-aligned with the interest of local constituencies writ large when it comes to the regulation of police conduct. A profit-maximizing governance structure would likely do a better job of internalizing the overall costs (social unrest, litigation, imprisonment expenses, …) implicit in the policies endorsed by policemen’s unions, and consequently be less beholden to them. Seems like a clear win to me.

      • The primary reason a citizen was harassed for a trivial crime is that the law made it an arrestable offense. That was the fundamental absurdity. That has to do not with the police union but with the city’s using the criminal justice system as a means of revenue collection.

        That sort of problem, driving the desperation of many municipalities, would be worsened by a private takeover, where the bottom line is indeed everything.

      • sflicht

        Your diagnosis of the “primary reason” seems a bit facile. Both the ludicrous legal framework *and* the political clout and posture of the police union are at issue. The law may be (part of) why Garner was harassed. The police union is most certainly a big part of why officers lack incentives to avoid using dangerous (and illegal) techniques like chokeholds in routine confrontations. I suspect that a privately managed city would redeploy security resources away from minor offenses like cigarette tax enforcement, and would also be willing to entertain policy choices with regard to the police that are politically untenable under democratic city governance. For example, faced with police work slowdowns like we’ve seen in NYC since Christmas or so, the managers of the city might opt to simply fire the whole police force (or at least unionized officers) and hire outside contractors to provide law enforcement services. I’m not saying I like all the implications of a city governance structure like this, or of this particular hypothetical response to the problem of police brutality. But I do think it is clear that private managers of a city would respond *differently* in this hypothetical, and that their response would *not necessarily* be worse than the response we’ve seen from democratically elected mayors and city councils.

      • I fully agree private management would respond differently. Your example goes to the heart of the differences, and if I anticipated that the cops would be less oppressive under privatized cities, I would find that a strong argument.

        But first, you can’t ignore the role of the money-grubbing city when you appraise the effects. A private money-grubber would (probably) be worse.

        Second, while the police union would become less powerful, so would ALL city unions. The first is a gain but the second is a far greater loss. [This might actually be, in the end, the main reason to reject the proposal.]

        Third, it seems to me that wherever there’s been privatization of law enforcement functions, there’s been more rather than less oppression. Private prisons are hell holes; private cops (Pinkertons) have been more reviled by labor than the government’s cops; private debt collection for the state are outrageous. (See “The prosecutor/debt collector complex” — http://kanbaroo.blogspot.com/2013/07/102nd-installment-prosecutordebt.html )

      • sflicht

        Some of those are fair points.

        On your first point (private versus government money-grubbing city managers), I wouldn’t romanticize the public money-grubbers too much. Part of the explanation for the militarization of domestic law enforcement surely involves all-too-cozy relationships among weapons manufacturers/lobbyists, police department heads, and city/state/federal government bureaucrats.

        On your second point, I suspect we fundamentally disagree as to whether the right to unionize is appropriate for public sector employees. It is precisely the (extreme) political influence of such public sector unions (primarily teachers and police) that is arguably objectionable.

        Your third point seems to be most valid.
        Do note, though, that of your examples of privatized law enforcement, only the Pinkerton case is analogous to the proposed scenario. Private prisons and state debt collections are lousy partly because government contracting is a(n inherently?) shady, corruption-ridden line of work. I don’t know enough about the history of labor violence to have a strong opinion about the Pinkerton case, so I’m happy to take your word for it that it is a clear cut case of oppression due to private law enforcement. In the modern era, though, I’d be interested to know the relative frequency with which private security guards (e.g. at malls) are accused of illegal use of force versus “real” publicly-employed police. (It is necessarily an imperfect comparison, since these firms are not employed to perform precisely the same security functions as police. But it still might give a ballpark answer to the question of whether private law enforcement hired by private firms is more or less abusive than public law enforcement employed by governments.)

      • lump1

        Maybe not altruistic helpers, but we voters do tend to stay within the ethical bounds of the mainstream, and “[undesirables] raus!” is well outside those bounds. Even if their eviction is within our economic interest, very few would want to signal their preference for this outcome.

    • Do you see private organizations pushing out undesirables today, at firms, shopping malls, schools, movie theaters, etc? Why fear more such behavior in these cities than you see other private orgs doing now?

      • Ken Arromdee

        Again, many types of pushing out undesirables would be illegal under antidiscrimination laws. I would guess that your private city scheme does not involve making the city owners obey antidiscrimination laws.

  • glasnost

    Good heavens, this post should be in a museum exhibit demonstrating the limitations of economics.

    What could go wrong? For starters, the new owner bulldozes all the property he now owns by fiat and fills it with a giant casino, destroying the lives and unknown years of future income of 100% of the prior residents in exchange for a 1.5X property values.


    ‘Difficult people cost more to those around them, and they *should* be charged more, in order to induce them to find the most efficient set of associates.’

    There’s a reason America created a system of due process, which is that trust values in the perfect information and judgment of our new tyrant-by-auction of who is and is not ‘difficult’ are not high.

    And you haven’t charged the difficult people money, you’ve simply evicted them. Which relocates them. Which accomplishes nothing. Less than nothing, because your disruptive act has decreased their productivity. But they still reside in America and cost America the same $.

    America doesn’t lack ways to penalize people, financially or otherwise, for disapproved behavior.

    The problem is that there’s no obvious reason why the highest bidder understands or has interest in whatever you perceive to be the optimal solutions to whatever problems you perceive in whatever cities we’re discussing. When the highest bidder is Mao Zedong, the outcome is the Great Leap Forward.

    More to the point, the interest groups don’t go away just because you’ve “handed over dictatorial power” to someone disinterested in them. It’s literally impossible for any city to function without its residents, who comprise its interest groups, who have an infinity of ways to fight with the new dictator’s preferences, just like they did before. The business owner is tyrant of his business and once upon a time the father was tyrant of his family, but the component serfs nevertheless can destroy the collective if they commit to it heavily enough.

    political science, sociology, and psychology don’t go away because you ask them to nicely, nor when you hold an auction, no matter how many can openers you assume.

    • When you throw a party, you decide who to invite, and you probably avoid inviting difficult people. By your argument above, your doing this is a bad thing, and we instead need a democratic process to force everyone to invite difficult people to their parties.

      • We do have such democratic processes. For example, civil-rights laws that prohibit discrimination by various criteria at “private clubs.”

        glasnost seems not so much committed to universalizing such democratic processes as you are to eliminating them.

      • We only restrict private clubs when we believe they are important to getting jobs. Dance clubs can discriminate by gender and beauty without any legal problems, for example. http://www.overcomingbias.com/2010/06/club-discrimination.html

      • IMASBA

        Cities are important to get jobs and homes… You haven’t answered glasnost point that “difficult” people will still have to live somewhere and eat. Who’s going to pay for that, the government? And when the government does will you then boast how inefficient the government is compared to the privately owned citizens which only allow model citizens in?

      • Actually difficult people don’t have to live anywhere. If people are so difficult that the sum of what they can earn plus their assets plus what charity others will give them still isn’t enough to get any place to take them, it isn’t clear that they should exist.

      • The most direct expression I’ve seen of Robin’s reactionary philosophy.

        But surely this is a contentious point of social morality. Even Robin might agree. Hence, it isn’t at all clear that economics has anything to say on the subject.

      • sflicht

        I don’t think this is necessarily reactionary in any meaningful sense of that word. In a sense, the idea is that current residents of a city could voluntarily elect to enter into a contract with a third party to govern their city for a predetermined period of time, in exchange for (some pre-specified fraction of) the consequent return on property values in the region, conditional upon some subset (everyone, a supermajority, a majority, or…?) of the residents agreeing to the same conditions. Is there something fundamentally illiberal in offering residents this choice? If so, why?

      • sflicht

        (Bearing in mind that the parties to be governed by the third party have both the assurance of the legal protections provided by state and federal law, as well as any additional provisions they choose to put in place as part of the contractual framework)

      • Peter David Jones

        I think Diamond was responding to the not everyone deserves to live proposal, not the privatised cities proposal.

      • IMASBA

        You can’t expect business to flourish in such a world where everyone is just one bankruptcy* or minor handicap away from being turned into soylent green… (not to mention People would become extremely risk-averse so even if all you care about is GDP it would be a really bad decision to handle things that way, in that world you could invent cold fusion and still have a hard time finding investors…

      • sflicht

        You’re kind of sensationalizing things with the soylent green remark. As I read it, we’re (for the moment) only discussing city governance. A possibly consistent worldview is that allowing corporate governance of cities is just *under the condition* that federal law still enforces bans upon things like killing people to turn them into food.

      • IMASBA

        In which case the cost just gets transferred back to the government (taxpayers), which was my original point that Robin could only escape from by suggesting we should let those people die.

      • “plus what charity others will give them”

        If I vote for slightly higher taxes to create prisons, homeless shelters, etc., that’s a kind of charity, right?

      • Kinda. More so if you are voting to raise your own taxes, instead of just others’ taxes.

      • Peter David Jones

        So who gets the right to life and death?

      • sflicht

        If the purchasing consortium is willing to pay a price (in the form of a transfer payment) that “difficult” people are willing to accept to relocate, would you agree that the resulting outcome is just? If not, why not?

      • IMASBA

        In that case the outcome would be just, but where exactly would these people relocate to if no city wants to take them?

      • When I was on that scene, I thought it obnoxious and absurd that the establishment should have the right to choose who enters, while the male would-be customers, singles in particular, line up like sheep. I surely would have voted (and would vote today) to deprive management of that right.

        One point being that these questions each raise their unique balance of considerations, so that you can’t blanket dismiss the discriminatory consequences of substituting the market for democratic process.

      • oldoddjobs

        “private clubs” aka private clubs

      • pgbh

        This is an amusing riposte. However, is it not possible that the statements

        a. Allowing people to exclude unwanted guests from their parties is a net positive

        b. Allowing people to exclude unwanted citizens from their cities is a net negative

        are true simultaneously?

        In other words, is there some important difference between cities and parties that could make it a good idea for private owners to kick people out of one, but not the other?

      • With all those words, I’d think that if you knew of such a difference, you would have mentioned it.

      • I suppose burden-of-proof arguments are tiresome, so I’ll bite.

        If the state dictates whom you can invite to parties, it violates citizens’ 1st Amendment right to associate with whomever they choose. [The right for a city to chose who lives there doesn’t involve freedom of association because you don’t associate with the vast majority of people in a city.]

        I don’t intend this as a purely legal argument; the law here expresses cultural values.

      • pgbh

        I can propose many possible differences.

        a. Cities are large, parties are small.
        b. It’s hard to keep people out of cities, easy for parties.
        c. People can live easily without parties, have trouble living without some sort of city.
        d. Parties are short-term, cities last a long time.
        e. Parties are cheap, cities represent a lot of capital.

        My point is not that any of these issues are necessarily very important. My point is that unless you can be quite sure there is no relevant difference, the analogy is useless. And it seems quite likely that, since these institutions are very different, such a difference does exist.

      • So you can think of differences, but you have no concrete argument for why these differences make a difference in a particular direction in this case. By your standard that any difference invalidates an argument by analogy no such argument is every valid, since any two things usually differ in a great many ways.

      • pgbh

        My claim wasn’t that “any” difference invalidates an analogy, it’s that “relevant” differences do. But without lots of detailed information you can’t be sure which differences are relevant, and if you have that much information you might as well skip the analogy entirely.

      • Agreed, this goes to the heart of Robin’s argument, insofar as he makes one.

        But I don’t find it highly amusing because it’s trite: I can recall the same riposte by conservatives against public accommodations civil-rights laws.

  • Arthur B.

    There have been reports of developers buying entire city blocks in Detroit. The strategy likely includes the internalization of some externalities. See for instance: http://detroit.curbed.com/archives/2013/01/gilbert-activates-stealth-mode-to-buy-entire-city-block.php

    Developers also build entire cities, getting commitments from many buyers. In doing so they capture the positive externality of population density.

  • This would involve forcing the residents to sell their property, which I think is immoral and expropriative; it would also make property rights completely insecure. I don’t know if you’ve considered the costs of that.

    This proposal has forgotten the purpose of economic theorising – the increase of human welfare. You’re removing the one check that prevents such economic ‘optimisation’ from being a net human negative – the non-coercive nature of economic transactions.

    Instead, I’d suggest treating cities as corporate entities, so that the ‘selling off’ consists only of public property and the city’s/municipal corporation’s assets (and so ownership or control of public property is handed over to the buyer, but not everyone else’s property). A bankrupt city should be treated like a bankrupt firm, and so on. This would be far more politically palatable, and also far better economically. Under such a model, for-profit cities would still vastly outperform public ones (I surmise; I don’t know for certain, though), and residents won’t have to live in perpetual fear.

    • sflicht

      In principle the property-sale aspect could be voluntary, if you can come up with an appropriate mechanism. (Perhaps some variant of a dominant assurance contract?) What you need is a way to solicit from each citizen the minimum price they would accept, in the form of a multiple of their assessed property value (as of some date in the past, possibly equal to zero) plus a transfer payment. For example, say I’m a renter and I oppose some of the policies the buying consortium will likely put into place, but if given a transfer payment of $100K I’d be happy. My landlord is indifferent to the policies but values his property stake at 1.75X its assessed value (that could be computed as the land + building value plus some discounted present value of the future rental profits). Etc.

    • IMASBA

      Yeah, transactions would indeed not be voluntary anymore. Of course the government also forces you to into involuntary transactions but at least you can vote and protest.

      With corporate entity cities (like you describe in your second paragraph) things could be different but the devil is in the details: so what kind of statutes and laws could such a corporate entity can introduce/change. In other words how much power would they have to ban old/sick/poor/unemployed people from their city, or to introduce Orwellian “security” regimes.

      • IMASBA

        Too add, the government isn’t a business, so even though it can uproot you it’s not really interested in doing so, while a business would live off of that sort of thing and be geared towards it.

  • JW Ogden

    For an example of how this might work out, The Villages, of Florida could be considered a privately owned city.

  • alexander stanislaw

    This is a pretty cool and original idea. Isn’t this more of a political problem than an economic one? Is there a precedence for buying direct political power in the developed world?


    Separate from my other posts on this topic I have some question for Robin.

    Do you think there would be always be enough players on the market, and enough separate cities in the world or country in question, to ensure competition (inside a city the corporation would have a monopoly on everything so the competition would have to occur when cities are resold) and does the population get to vote on who the new owners will be and how unanymous does that vote have to be?

    The first question I asked because right now countries in Europe are having trouble with lack of competition in for example privatized public transportation and water delivery/treatment. Some countries only have a handful of major cities or regions to give out a contract for and some corporations work multiple cities or regions. They’re trying to make such markets occur on a European (EU) level rather than on a national level to spur more competition.

    • IMASBA

      P.S. Is it even possible to make a nice profit on running a city within the life expectancy of an investor? I mean it’s going to cost a colossal capital to buy the city and the trust of its population. Is there a very high level of wealth inequality required for groups to emerge that can buy entire cities or will citizens become shareholders themselves and resort to creating enclaves of shareholders of the same corporation (and would that be any more efficient than a government?)

      • We don’t need to answer this. Just set up the auction as see if bidders can be found.

      • Peter David Jones

        Given the high levels of apprehension about this scheme , there is no way this is relistically going to happen without a lot of legislative protection, and that means there is a lot of work to be done in drafting the legislation, and figuring out will allow for profit.

      • sflicht

        I posted elsewhere about this, but I think it’s quite plausible that there will be city-running investments that will generate quite substantial ROI within 10-15 years. Basically, your prior on this should depend on how bad a job you think democratic city governance does at capitalizing on low-hanging fruit (economic gains from technological advances that have already taken place, capitalization of which is stymied only by coordination failures).

      • IMASBA

        Does it not also depend on the selling price (the price you initially have to pay the residents to agree to the whole thing)?

      • sflicht

        Of course it does. But note that you could buy out each resident of San Francisco, say, with something like $100K (on top of their property value) for a small fraction of the price you pay for all the property.

      • IMASBA

        You are aware that we’re talking about hundreds of billions or trillions of dollars per city, right?

      • sflicht

        Yes. Using SF as an example, it would cost about $85B to buy off the residents with $100K apiece. At double the assessed value, say, I’d estimate the value of the property to be in the $500B-$1T range. So the property is much more valuable than the cost of buying the votes you need.

      • IMASBA

        Buying the properties is part of the “selling price”, you didn’t mention it when you should the prior should depend on how inefficient one thinks governments are today. Here’s the thing, I don’t think you can buy (municipal) SF for ~$1100 billion and make a profit that’s competitive with other investments within 20 or even 30 years. People also keep forgetting that it’s not enough for a business to merely be more efficient at running things than a government is. A business has overhead in the forms of a competitive profit margin, more highly paid employees, marketing, more strict deficit/debt requirements and not getting help from volunteers. A business has to work quit hard to be outshine government and be profitable enough to attract investors, even when they’re getting the infrastructure at a discount and have an eternity to make a profit (real world privatization). A privatized city where the infrastructure has to be bought at a surcharge and the profit has to be made within 30 years is even more difficult to accomplish (especially when many of the perceived inefficiencies of government stem from governments trying to take care of the poor, sick, the environment and other “externalities” that businesses can simply choose to ignore).

    • If you mean competition for the residents there is a whole world to move to. But of course the more tied to location people are the more it will cost them to move. That raises the risks of the price discrimination problem I discussed, but doesn’t otherwise threaten the proposal.

  • lump1

    Have you ever attended to the lyrics of “Kill the Poor” by the Dead Kennedys? A brilliant song! The premise is that some rich people finally take unpleasant urban matters into their own hands, and “sanitize” the unproductive city parts with neutron bombs (“no less value to property”) so that they have “more room to play”.

    You probably weren’t imagining massive gamma ray bursts as lying within the “autonomy” of the new buyers, but I can tell you that if someone was crazy enough to buy my city and then tried adding value to it, the first thing I expect them to try would be to clear out the slums where people are being regularly shot. The evicted residents would become someone else’s problem, while their neighborhoods are re-developed and grow in value.

    Globally, this is not an efficient solution, because the problem only becomes worse when former slum residents become refugees. But I think that if municipalities were investments, the incentive to drive them out would be too strong. To get around this, maybe we should just let rich people buy entire countries? Oh wait.

    • Do you see this eviction happening in all of the other for-profit organizations you see around you, like firms and shopping malls and social media sites?

      • Lord

        We do and we like it. All those neat, clean, surroundings and well behaved users. Disneyland. It isn’t so great if we don’t fit their preferences, and it can be stifling eventually.

      • Ken Arromdee

        In some cases, we don’t see such eviction happening because it would be illegal under antidiscrimination laws. A firm or shopping mall that tried to keep undesirables out, and ended up keeping out a disproportionate number of black people, would end up in court.

  • Lord

    I would support this, but only if I were ready to take the money and run. I have no interest in living under the thumb of a landlord or of losing my largest investment, nor would most. Even associations can be onerous. One that could control where you lived, shopped, and worked would make you a serf, however benevolent. You could never trust to benefit from any investment whether in yourself, property, work, or business. It would be a powerful design to achieve a mission but less so to encourage a diverse adaptive community. The joy of enlisting in the army. It has its benefits, but you had better like to take orders or be expelled. These always need somewhere to expel the uncooperative, incompetent, or no longer able.

    • sflicht

      Your largest investment is your house, which you bought (say) for $50K down plus a mortgage with present value of $100K. Let’s suppose housing prices have remained static since your purchase. If you were offered $300K, would you really reject it? I actually doubt it. Yes, you have roots in the community, but (a) no one is preventing you from renting either the same or a different residence from the new property owners, and (b) $150K capital gain is nothing to sneeze at. My point is: there is some price at which you would be willing to switch from renting to owning, and feel good about it, not like a serf.

      • Lord

        Willing only if there is an better alternative I can buy (and cover the expense of the change). I would not be willing to rent. The problem with rents is they have a tendency to rise. If your income doesn’t you are sorted out. This is what happens in desirable coastal areas. Buy before you retire or be forced to retire inland.

      • sflicht

        Sorry but that’s just dumb. Like, totally stupid. If there is no price you would accept to rent rather than buy then you are just being dumb. Not “irrational” or “inconsistent with the neoclassical model” — simply dumb. If you are unable to comprehend the *fact* that at some price, you would accept a lump sum payment in lieu of a future revenue stream, then you are simply denying reality. Not only do I not believe you, I assume you are being disingenuous. Why are you lying?

      • Lord

        Why would I want to trade a known value for an unknown stream of future rental payments, especially when I know it will rise and fully expect that over time I will not be able to afford them? Now you can say that if the amount is sufficient it might be invested in other ways to cover those future costs but it would involved accepting the risks of that investment and the risk that the returns of that investment may not match that of what I wish to possess. The numbers that matter are not what is offered but all those unknown future numbers to the end of my days, so no, I am not willing.

      • If you are unable to comprehend the *fact* that at some price, you would accept a lump sum payment in lieu of a future revenue stream, then you are simply denying reality.

        A strange and extreme dogma!

        You apparently truly believe that you can predict with certainty that Lord would accept some amount of money for his house.

        [Is there nothing that you wouldn’t trade for money? If that’s really the case, it might be “stupid” to announce it.]

    • TheBrett

      Not so much the army as a Company Town, where the firm/consortium controls all of the nearby shopping, services, and housing. Historically, such situations are very, very, very prone to exploitation and illegal use of power (like violence to keep people from leaving).

      • Lord

        Or Singapore. Import workers when you need them and send them back when you don’t. The power structure just varies in level of clarity, detail, and explicitness.

      • You should read the real history of company towns. Not remotely as bad as you’ve heard.

      • TheBrett

        A handful of them could be good at first, when profits were high and the original owners’ benevolence was still at work – see the Lowell Mills early on. But they almost always turned exploitive over time (like Pullman), and many were exploitive from the beginning (go ask Erik Loomis about the history of labor camps in Oregon).

  • TheBrett

    I can’t see this ever being cost-effective if you had to win over a city to vote for it. The consortium would end up making so many guarantees for the vote – ironclad rental contracts for residential and commercial properties that want them, job security for public workers, environmental and safety rights – that they’d have very little latitude to do anything without breaking the contracts and the law after the transfer of power. They’d be buying the rights to develop a few commercial districts in the city, at most.

    It’d be more realistic for companies to buy off the rights to set up cities on unincorporated land, essentially creating temporary company towns with mandatory transfer of power. Mandatory, that is, unless the company acts like almost any other monopoly rights-holder in the US and lobbies for an extension of control.

    And even once you’re past that, the history of company towns and privatized prisons makes me skeptical about promises of better governance at better cost and efficiency. The near-universal route for companies in similar situations is to take advantage of their monopoly power to jack up prices as much as possible, and drastically lower quality of service to save money. I’d expect most of the rank-and-file public workers (including police) to be replaced by cheaper, lower-trained employees (maybe even temps), although they’d keep some of the “management” at higher pay.

    • You’d get a vote to agree to an auction, without knowing who would win the auction. So the vote wouldn’t depend on promises from the winner.

      • IMASBA

        The question is, will people vote for an auction if they don’t get any guarantees. You could say a high enough price may win over those concerns but a) such a selling price may not be feasible and b) the thing about auctions is that you don’t know what the final selling price will be, so why risk it (or how does this market actually select for good governance if the richest corporation always wins?)

        This is where I’m not completely clear about the whole idea. Is the next corporation supposed to buy the city from the previous corporation or from the residents? If it’s the former then the population has no incentive to vote for an auction, unless they think they’re so badly run that chances are the highest bidder will be less worse (which would be a complete gamble because there’s no selling price or reputation of the new corporation to go on), if it’s the latter than what incentive do the corporations have to not just stripmine the cities they own while they own them?

  • Joshua Brulé

    It seems to me that whoever owned the city would gain a number of natural monopolies: intra-city transportation, utilities, and indirectly, stuff like food and water. Isn’t this just trading one source of economic inefficiencies for another?

    However, I think this is my only objection to the idea. If you can convince me this isn’t as big of a problem as I suspect it is, I’d be all for trying it.

  • Tony

    What just stops them from wringing wealth from the city dry over the timeframe extractively?

  • Tom

    Be very, VERY careful of exactly what it is that’s being optimized. A buyer who has to sell after 20 years will try to optimize profit over those 20 years, and this optimal solution may have very little to do with optimizing welfare of the city’s residents. There is little incentive to looking after the long-term welfare of the city.

    I’m reminded of the old Roman tax collectors who promised to collect a certain amount of taxes. If they collected more than they promised, they got to keep the extra. The system was heavily abused and some cite it as one of the reasons the empire fell.

    • erikbjareholt

      If the buyer has to sell it is in their interest to ensure the city shows as much promise as possible at the end of the 20 years, so in fact they do have an incentive.

      • Tom

        The buyer’s interest is to maximize profits over 20 years. They can invest in the city and get a huge payout at the end, but then again they can also squeeze the city for 20 years and then dump it for whatever price they can get. It’s not obvious to me that the former is the most profitable.

      • If a city is worth more being deconstructed than it is being preserved and expanded, then it *should* be deconstructed. Same for a firm or a house or a car. Not everything should last.

      • Tom

        Careful here. A city owner who doesn’t have to deal with the fallout may consider it worth deconstructing, but the state that has to deal with the political fallout and is faced with millions of displaced people may well reach the opposite conclusion.

      • Today the cities, tomorrow the states!

      • IMASBA

        If you set the ownership period short enough everything is worth more being stripmined than being developed, you as an economist should know that. Businesses do not plan ahead well over periods longer than the life expectancy of the shareholders (perhaps neither do governments but governments don’t have to buy entire cities every 20 years or turn a competitive profit), that too is something you as an economist should know.

      • UWIR

        “If you set the ownership period short enough everything is worth more being stripmined than being developed”

        Only if you don’t have buyers willing to pay more for developed assets.

        “Businesses do not plan ahead well over periods longer than the life expectancy of the shareholders”

        With a life expectancy of, say, 70 years, and an OCC of 10%, a future dollar has a NPV of about 0.12 cents. You’d have to have really high future benefits for it to be worth spending money now.

      • IMASBA

        “Only if you don’t have buyers willing to pay more for developed assets.”

        If you set the ownership period short enough you won’t have time to develop the assets enough, that’s the whole point.

        How many 10 year olds buy stocks? Shareholder life expectancy is a lot shorter than 70 years…

      • UWIR

        “If you set the ownership period short enough you won’t have time to develop the assets enough, that’s the whole point.”

        What you’re saying makes no fucking sense, that’s the point. Time to develop enough for WHAT? Is it too much to ask that you actually explain what you’re thinking?

        “Shareholder life expectancy is a lot shorter than 70 years…”

        Gee, let’s accuse people of not planning well on a timeframe of X, but let’s not tell anyone what X is, instead let’s use the vague term “life expectancy”, and then lambaste anyone who tries to engage our claim!

      • IMASBA

        Time enough to develop it into something that can be sold at a profit. The fact that it’s easier to destroy than to create is almost universal, cfeation can be more profitable in the long term but for that yku have to be given a long term to work with (long period of ownership and reserves to carry out the work and feed yourself in the meantime). You seem to be trying very hard to not understand what every small time peddler or rainforest-burning brazilian peasant understands.

      • UWIR

        “Time enough to develop it into something that can be sold at a profit.”

        If there is any time frame under which it can be sold at a profit, then it can be sold at a profit at any time frame, given sufficient market liquidity. That’s how the stock market works. A company can have a business plan that involves losing money in the short term, and its stock will trade according to the market’s expectation of its future value, not its completed value.

        “The fact that it’s easier to destroy than to create is almost universal”

        The issue isn’t what’s easier, it’s what more profitable.

        “cfeation can be more profitable in the long term but for that yku have to be given a long term to work with”

        In an assembly line, each worker has time to do only a small part of the job, yet each of them profits. You are making wildly false claims.

        “You seem to be trying very hard to not understand what every small time peddler or rainforest-burning brazilian peasant understands.”

        I’m having to work really hard to get you to actually discuss issues rationally, and even harder to do so politely. You are being incredibly dense and rude. You keep talking in circles, and then wondering that I ask you to clarify what your argument is.

        People don’t burn rainforests because of a general principle of stripmining being more profitable than development in the short run. They burn rainforests either because it’s more profitable, regardless of time frame, or because they aren’t able to fully capture the benefits of the long run.

      • IMASBA

        In the last sentence you answer your own question. An ownership period that doesn’t last long enough leaves you unable to fully capture the benefits. The stock market changes nothing about this, since your stocks will never yield dividend. In Robin’s proposal a corporation may be forced to sell a city after 20 years, regardless of how far along they are in the process of making it profitable.

      • IMASBA

        Correction, we don’t even know for sure if the idea is to let the corporation sell or to let the population sell. In the latter case the corporations really have a strong incentive to stripmine if they cannot turn a bigger operating within 20 years.

      • UWIR

        “In the last sentence you answer your own question. An ownership period that doesn’t last long enough leaves you unable to fully capture the benefits.”

        It’s not just a matter of the time period, it’s the liquidity of the market. I’m saying that with sufficient liquidity, any time period can be profitable, while you’re trying to make a categorical statement with a short enough time period, it is never profitable. That is absurd.

        “The stock market changes nothing about this, since your stocks will never yield dividend.”

        That doesn’t make sense. I really don’t understand what point you think you’re making; once again, you’re just assuming your point is clear. Socks are priced at the expected value in the future. Many stocks go years without paying any dividend.

        “In Robin’s proposal a corporation may be forced to sell a city after 20 years, regardless of how far along they are in the process of making it profitable.”

        If they develop the city, then it will be profitable, as long as they have a proper buyer.

  • democracies regularly vote to exclude immigrants who would in fact benefit them materially.

    Immigration control has actually been the co-equal of progressive taxation in reducing income inequality and increasing median income. ( http://aeon.co/magazine/society/peter-turchin-wealth-poverty/ ) [IMBASA’s point about variance versus the mean.]

    [Robin also neglects the voters’ interest in maintaining the cultural status quo.]

    At the state and local level, government is indeed engaged in redistribution — but it’s redistribution from the poor and the middle class to the wealthy.

    The same article Robin references shows that this is a peculiarly American phenomenon rather than an inherent feature of democratic local government. [A peculiarly American implementation of proprietary cities might also be expected to be particularly classist.]

    • Grant

      Of course keeping poor people (immigrants) out of your country decreases inequality. This truism would only seem relevant if you’re an economic nationalist and more interested in getting a sweet gini coefficient score than actually helping (poor) people.

      Put another way, why is it worse to arbitrarily exile citizens (supposing relocation costs were paid) than prevent immigration?

      • Controlling immigration doesn’t decrease inequality mainly by excluding the foreign poor, as you imply.

        One reason to favor low migration rates is that the level of societal solidarity decreases with multiculturalism, which is partly responsible for the near-death of the labor movement. [In answer to your question in the second paragraph.]

        Note that we’re here talking about reasonable positions held by voters, not my analysis or proposals. The basic point is that voting citizens perceive they will be more likely to be poor given mass immigration, and this isn’t an unreasonable view.

  • Cahokia

    Robin: “Actually difficult people don’t have to live anywhere. If people are so difficult that the sum of what they can earn plus their assets plus what charity others will give them still isn’t enough to get any place to take them, it isn’t clear that they should exist.”

    If you really believe this, it deserves its own post.

    • anon

      It’s also the most hilariously stereotypical economist thing I’ve ever heard an economist say, and I want some more of it.

    • UWIR

      Where is that quote coming from?

  • The main argument against doing this that occurred to me is that LVT accomplishes the same thing (reduction in inefficiencies by incentivizing growth) in a less centralized way, which could protect it from failure modes involving mismanagement. However, it seems there are some possible advantages, and perhaps the ideas are complementary.

    For example, LVT doesn’t necessarily disincentivize certain bad things like putting up a smelly factory near a nice residential area. From the lot owner’s perspective, the factory would constitute an improvement that would make them more wealthy due to its productivity (perhaps better than the residential rental value for a similarly priced improvement), it would benefit from having the nearby workers, and yet by making the residential area less desirable for (certain kinds of) residential use it would also make the land value (and hence tax) for its immediate surroundings lower.

    Despite the advantage of reduced commutes for workers, the residential area would benefit non-working wealthier people, such as older retirees, far less than working young people. So although the land value has potential to be significantly higher as a developed residential district without the specific industrial improvements, it is made lower by their effects. Industries likewise might profit only marginally by having nearby workers, but more by having other industries nearby, making the nearness of residential buildings more harmful than beneficial.

    Normally, a city would attempt to manage a situation like this by zoning, permits to run businesses, etc. And this approach is certainly compatible with LVT. However, one might argue that LVT incentivizes people to circumvent the red tape in such situations, fostering corruption and so on. A centrally-managed-for-profit city would have financial incentive to resolve this kind of issue (in addition to trying to increase development density, which would be where it complements LVT) because they are concerned with raising the value of the land within the city as a whole. It would view corruption as a financial competitor.

    • A land value tax is a source of tax revenue, it isn’t a governance mechanism. Governments can still make very bad decisions under that tax system.

      • It’s a pigouvian tax which penalizes utilization of excess land area, encouraging more dense utilization of land. An analogy could be made to pollution taxes causing industries to seek cleaner practices. Being a source of revenue does not conflict with this. I agree that further governance mechanisms are needed though.

      • wmyl

        LVT eliminates the most common forms of corruption, which is why I am curious to know your meaning about LVT possibly causing corruption.

      • I was just referring to the situation I gave where an industrial developer might find their short term interests at odds with those seeking to develop residentially, to the detriment of the longer term growth of the area. Given the interests not aligning, city planners would need to weigh in to prevent it. Presumably in some situations, the short term profits might be extreme enough to motivate bribery, etc. to circumvent such efforts. I don’t see reason to assume this kind of conflict occurs more frequently in a Georgist scheme than not, though.

      • wmyl

        The real profit to be had in zoning changes is actually land value. Without any zoning, either the industrial developer or the housing developer might end up with the location, depending on which of them could make better financial use of the location, since that developer would be able to pay more for access. But an LVT is capped by the legally permitted uses of a location, so if there were a zoning regulation stating that a site could only be used for single detached housing, the maximum that the holder would have to would be the rent from that sort of use. There would be no profit to the holder or anyone else by a city upzoning that site to higher value commercial use, since the nearly entire uplift in value would be captured by the public. Furthermore, neighboring landowners have little reason to complain about zoning changes or to bribe officials, because if the zoning change makes their locations less valuable, they would pay a lower LVT in return.

      • wmyl

        You might be interested in Spencer Heath’s Georgist argument for corporate cities. Here is an issue from the journal Fragments (Heartland Institute) that covers the topic.


    • wmyl

      Can you give an example of this?

      “However, one might argue that LVT incentivizes people to circumvent the red tape in such situations, fostering corruption and so on.”

  • What possible reason is there to expect that the interests of a private interest owning an entire city would line up with those of the residents of that city?

    • Peter David Jones

      Its not about making people happy, its about EFFICIENCY.

    • The interests of the firm would be in raising the land value. This would probably tend to involve attracting more residents, increasing density of developments, making sure developments are optimally placed with respect to each other, keeping crime low, preventing fires, providing convenient utilities, providing convenient transportation, encouraging industry, and so on.

      Does this conflict with the interests of some residents? Yes. Some residents interests are sometimes served by preventing land value from increasing. But you run into that problem with nonprofit municipal governments as well. Generally speaking, more people’s interests tend to be served by increasing the value of the land.

      • I’m a bit gobsmacked by the idea that what’s wrong with modern cities is that there’s not enough focus on raising land values. If anything we have the exact opposite problem: municipal governments spend all their time trying to increase land values in order to improve their tax base, rather than focusing on the needs of their city’s residents.

  • dlr

    Surely this model already exists: in planned communities. They don’t tend to buy existing cities, they tend to buy a large chunk of empty land, partition it up into lots, put in streets and utilities, and put together a code of by-laws, and then begin selling off individual lots to homeowners and homebuilders. They don’t mess around with renting out individual homes, they make their money off ‘homeowner’s association fees’, and appreciation in the value of the unsold lots as the population increases.

    I live in such a community. It’s in an unincorporated area, but provides it’s own fire dept, ‘public safety’ and garbage collection, and a recreation center all ‘free of charge’, ie, paid for out of the homeowners association fees.

    The interesting thing is the voting rules that were set up in the by-laws. Each lot owner has one vote. Each lot that has been built on pays one level of homeowners association fees. Lots that have been sold but not built on pay a lower, but still non trivial, homeowner’s association fee. The interesting thing is the lots that are still owner by the company. They pay no fees, but each one still has a vote.

    This development has been in the process of development for more than 20 years, and the majority of lots still belong to the company, ie, the development company would win any vote that came up. Presumably they will continue to do so for a long time, even when they have sold enough lots to reach the tipping point of having less than 50% of the total number of lots (ie, even when they only own 30% of the lots total, it would presumably still be pretty hard to win a vote against them on any issue).

    Right now, economic self interest, more or less, seems to keep the development company somewhat honest. ‘Homeowner’s association fees’ seem pretty high, objectively, for any benefit that is conferred, but the streets are all well maintained, and safe, and the garbage does get picked up. They have enough recreational activities that they can plausibly tout this as an active retirement community, etc.

    I haven’t looked into it, but I bet most “planned communities” have by-laws that were set up to maintain the decision making power of the development company in one way or another. An easy way to see if ‘privately run cities’ raise property values, or lower them would be to compare the cost of homes (in $ per sq. ft) inside and right outside the development. Or the price of a vacant lot ditto. If ‘privately owned cities’ make sense economically, you’re going to see that reflected in the price of homes and land.

    I can’t say that I’ve seen a big difference around here in prices inside and outside the planned community, but when I moved here, I looked at property both inside the planned community and in the nearest town (about 10 miles away). I didn’t notice there being a difference in home prices inside and outside the community. If it existed, it was certainly less than 10%, and I wouldn’t care to guess which direction. Public services were better inside the planned community than in the nearby town, but then the town residents didn’t have to pay a homeowner’s fee every month either. It seemed like a pretty equal trade-off to me. At least, I’d have been willing to buy in either place.

    HOWEVER, the nearby town is also fairly well run. There are no slums, there is no problems with crime, streets are well maintained, etc. Possibly that’s because both the town and the planned community are fairly small (maybe 10,000 people each) in a fairly rural area, and well away from all the problems of a large urban conglomeration.

  • Gudamor

    I feel like this idea should be tried, if only because I expect it to fail in a surprising and novel way.

    • The world as a whole clearly fails to coordinate to induce ideas like this to be tried somewhere. One needs a much smaller chance of an idea like this working out to justify one trial once somewhere.

      • Peter David Jones

        Justify to whom? A failure could be very disutilitous indeed to those on the ground.

      • IMASBA

        Create an insurance for participants in crazy economic experiments such as privately run cities, but try to make sure that doesn’t change the behavior of the ones carrying out the experiment, if that is possible. As it is our privatized profits, socialized losses world does not motivate people to let themselves be subjected to commercial economic experiments.

  • wmyl

    The only good thing about this idea is that a profit motivated company that owns a city government would certainly end all harmful taxation and replace them with a pseudo-Georgist “single tax”, an achievement that is nearly impossible under current democratic circumstances, although a few small Pennsylvania towns and school districts have recently managed to succeed at a low level. Actually, when I think about how bad democracy is, it almost causes me to dislike ancaps and monarchists less strongly.

  • pgbh

    The article you link at the end doesn’t at all support your proposed conclusion.

    When you say that government is redistributing money to some people, what I expect you’re claiming is that those people receive more from the government than they pay to it. But the article does not say that.

    Instead, it says that wealthy people pay a smaller percentage of their income in taxes. Which is pretty obvious, since social security contributions are a large part of the typical person’s tax bill, and they are capped at some level. But it is different from “redistribution” to wealthy people.

    In fact the absolute magnitude of a wealthy person’s tax contribution is hundreds or thousands that of a poor person. Which is more or less what you would expect.

    • A tax that is less than proportionate is a regressive tax. Even Hayek considered proportionate taxation the just formula–benefits of state action are roughly proportionate to income. (Perhaps it would really be more accurate to say proportionate to wealth.)

      If Americans are subject to predominantly regressive taxes, this is redistribution to the rich. It’s not as one would necessarily expect. Europe proves that.

      • Lance Combs

        “If Americans are subject to predominantly regressive taxes, this is redistribution to the rich.”

        That concept requires a misrepresentation of the meaning of the word “distribution”.

        You can argue that it is regressive. You cannot argue that it is redistribution to the rich, as that would be literally incorrect (unless other criteria were added – such as programs that tax the poor or middle class to pay for benefits gained by only the rich).

        Speaking of redistribution. Do you pay your energy bill based on your neighbor’s usage? But, what if your neighbor is poor and wants to turn up his thermostat? Does the energy company increase your bill to pay for it (yes, in a general sense, since demand increases price; but I mean in the specific sense)?

        Why do we accept this from government. Government, after all, is simply a large security/protection corporation with a monopoly on the use of force.

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  • Purple City

    Please, put down your weapon.

    You now have fifteen seconds to comply.

  • lemmycaution

    People can build all the new cities they want. Nobody does this because real cities includes networks of people that can’t be willed into being by fiat.

    • JW Ogden

      Not nobody, The Villages near Ocala FL ar pretty much a new private city. Haile Plantation here in Gainesville FL have many aspects on a city.

  • Guest

    I love the idea of buying up city property, preferably where residents are located, and then bulldozing the homes (residents have 15 seconds to leave their habitat), processing the debris, and mining gold.

    Admittedly this gold is likely to be in the form of jewelery, but some may be in the form of fillings and those are valuable too! This method is likely to be extremely profitable and I estimate that there is a large untapped amount of gold just sitting around residential neighborhoods that could easily be processed and sold at decent prices.

    After mining is finished, you can just sprinkle some grass seed on the ground and wait for any surviving wildlife to rebuild their habitats, should they still live in the area.