The benefits of the market in both infrastructure and urbanism

Alain Bertaud, a senior research scholar at the Urbanization Project, has had a long career in urban planning, and many of his writings have a market urbanist flavor. He is currently working a book called Order Without Design, and last year he published an excerpt from that book called “The Formation of Urban Spatial Structures: Market vs. Design.” In the article he offers a compelling case for letting the market determine building sizes and uses, but he argues that infrastructure provision must be left to the state. I agreed wholeheartedly with the first portion of his paper, but find that his arguments for the market in land use contradict his arguments for the state in infrastructure.

Bertaud eloquently explains the knowledge problem facing urban planners who seek to regulate efficient land use patterns. Because economic growth is such a complex process that’s dynamic over time, he explains that top-down design will fail to keep up with changing land use needs to the detriment of economic growth. He cites Hartford, Connecticut as an example. The city developed a large insurance industry, but as it became profitable for American insurance companies to outsource clerical work abroad, fewer Connecticut residents find employment in the industry. However, in a futile effort to maintain jobs, urban planners have refused to update land use regulations to permit new employment opportunities. Rather than succeeding in keeping historical sources of employment in place, urban planners have prevented economic diversity that can hedge against a downturn in a specific industry.

Bertaud describes price mechanism that allows the market to identify land’s highest value use:

Markets …  recycle obsolete land use quasi-automatically through rising and falling prices. This constant land recycling is usually very positive for the longterm welfare of the urban population. In the short term, changes in  land use and in the spatial concentration of employment are disorienting and alarming for workers and firms alike. Responding to the disruptions caused by land use changes, local governments are often tempted to intervene in order to slow down the rate of change and to prevent the recycling of obsolete land use. However, the long-range effects of maintaining obsolete land use through regulations are disastrous for future employment levels and for the general welfare of urban dwellers.

While Bertaud waxes romantic about the power of the market in allocating land use and supporting economic growth, he makes two primary arguments for why the private sector cannot provide road networks. First, he asserts that private sector is incapable of assembling the necessary rights-of-way to build major thoroughfares.  Second, he makes an externality argument. He says that because roads can improve accessibility and increase land values, it’s “impractical to allocate and to recover its cost from beneficiaries since not only road users but also landowners benefit from better accessibility.”

To the first point, it’s false that the private sector is incapable of constructing a road network beyond local access streets. In fact, several major roads in the United States have been financed, constructed, and maintained by private companies that collected tolls. By constructing these roads in existing easements, these companies didn’t need to resort to eminent domain. Private U.S. companies built turnpikes in an era when road building was much less efficient than it is today, and more importantly tolls had to be collected by humans in tollbooths, rather than electronically, requiring more overhead than a toll system would today. Turnpike companies sought investments from landowners near the road who stood to gain from road construction, demonstrating that mutually beneficial exchange can happen even in the face of the externalities that Bertaud describes. Aside from roads, private enterprise has historically provided canals, streetcars, and elevated rails demonstrating the powerful incentive that people have for identifying opportunities for cooperation even when the benefits to buying and selling a good aren’t fully captured by the consumer and producer. Bertaud points out that, unlike regulators, the price system can effectively make tradeoffs between land uses. Similarly, the price system could determine resource allocation between different types of transportation, but instead this role is delegated to “designers” in developed countries today.

History demonstrates that privately built and financed roads are in fact possible, but Bertaud is likely correct that they would not be possible in developed countries today because government infrastructure spending and regulations have largely crowded out private investment in the industry. Those who assume that roads must be built by the government rely on market failure arguments to assert that the private sector fails to produce the efficient amount of infrastructure. Bertaud writes, “to build an effective, citywide circulation network, a city needs to connect privately-built roads, linking various neighborhoods and allowing travel speeds consistent with the efficient functioning of labor markets.”

It’s possible that the free market would fail to reach some optimum level of travel speed as identified by technocrats, but it’s key to note that government’s infrastructure building record is rife with failures. The political process results in bridges to nowhere and costly mixed-traffic streetcars. Robert Caro provides a detailed account of Robert Moses’ trangressions against the people of New York for the cause of his infrastructure building mania, but neighborhoods across the country were irreparably damaged by highways with relatively little recognition of the damage wrought by government road building. Unlike state road designers who can raze entire neighborhoods for the sake of infrastructure, privately built roads would not likely be built through densely populated neighborhoods.