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Hayek supported MARKET-BASED strategies for urban planning/ town planning

EXTRACTS FROM Lawrence W. C. Lai’s Hayek and town planning: A note on Hayek’s views towards town planning in The Constitution of LibertyEnvironment and Planning A31(9):1567-1582 · September 1999.

In The Constitution of Liberty Hayek made a distinction between (a) ‘town planning’ as practical measures to correct an imperfect land market, and (b) ‘town  planning’ aimed at displacing the market mechanism altogether. Hayek rejected the latter but accepted the former.

 In chapter 21, “Housing and planning”, of The Constitution of Liberty … Hayek acknowledged the validity of the Pigovian concept of neighbourhood  effects:

“The general formulas of private property or freedom of contract do not … provide an immediate answer to the complex problems (neighbourhood effects) which city life raises- … Some division of the right of control between the holders of a superior right to determine the character of a large district to be developed and the owners of inferior right to the use of smaller units …” (italics in the original).

Hayek’s “holders of a superior right” obviously refers to town planners, “owners of inferior right” indicates land users, and the determination of the “character of a large district to be developed” suggests zoning intervention. Hayek was therefore subscribing to the market-failure thesis ‘externalities’ in the land market, an example of which (in the parable of a ‘land-use conflict’ between wheat farming and cattle raising) was demonstrated by Coase in his 1960 paper. In that paper Coase argued that the concept of externalities is highly suspect as the basis for definitive government regulation.

Hayek’s concept was not that different from Pigou’s concept of social cost:

“A different set of problems is raised by the fact that in the close contiguity of city living the price mechanism reflects only imperfectly the benefit or harm to others that a property owner may cause by his actions” (italics added).

Hayek did distinguish the mode of town planning which was ‘pro-market’ and accept­able to him from another mode, which was not. … In The Constitution of Liberty Hayek made a distinction between (a) ‘town planning’ as practical measures to correct an imperfect land market, and (b) ‘town  planning’ aimed at displacing the market mechanism altogether. Hayek rejected the latter but accepted the former.

But though the price mechanism is an imperfect guide for the use of urban land, it is still an indispensable guide if development is to be left to private initiative and if all knowledge and foresight dispersed among many men is to be used. There is a strong case for taking whatever practical measures can be found to cause the (price) mechanism to operate more efficiently by making owners take into consideration all possible effects of their decisions. The framework of rules within which the decisions of the private owner are likely to agree with the public interest will therefore in this case have to be more detailed and more adjusted to particular local circumstances than is necessary with other kinds of property. Such ‘town planning’, which operated largely through its effects on the market and through the establishing of general conditions to which all developments of a district or neighbourhood must conform but which, within these conditions, leaves the decisions to individual owner, is part of the effort to make the market mechanism more effective”.

Unacceptable town planning

“There is a very different type of control, however, which is also practised under the name of ‘town planning’. Unlike the other [mentioned above], this is motivated by the desire to dispense ith the price mechanism and to replace it by central direction. Much of the town planning that is in fact carried out, particularly by architects and engineers who have never understood the role that prices play in coordinating individual activities, is of this kind”.

This says it all, really.

Hayek was alluding to MECHANISM DESIGN to incorporate the preferences of markets more effectively (including any adverse social costs/externalities).

For quite some time now, I have been advocating Coasean bargains or at least auction of development rights as the only market-compatible solution.

Sadly, the planning system across the world is controlled by control freaks and there is no hope of getting market-based mechanisms into the system.

Town planning has become a primary source of inefficiency in the West.

Sanjeev Sabhlok

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