Thoughts on economics and liberty

Hayek’s Chapter 22. On urban planning.

In understanding any policy it is crucial to carefully consider the views of Hayek. He has a way of asking fundamental questions that can illuminate many a convoluted area of public affairs. This is chapter 22 of his Constitution of Liberty. Download a Word version here.


If the government simultaneously abolished housing subsidies and cut working class taxation by an amount exactly equal to the subsidies the working classes would be no worse off financially; but they would then without any doubt prefer to spend the money in other ways than on housing, and would live in overcrowded and inadequately provided houses, some because they do not know the advantages of better housing, and others because they value these too lightly in comparison with other ways of spending their money. That is the case, and the only case for housing subsidies, and it is put here in its crudest form because the matter is so often discussed in left wing literature without facing reality. —William Arthur Lewis [in Sir William Arthur Lewis’s The Principles of Economic Planning: A Study Prepared for the Fabian Society (London: D. Dobson, 1949), p. 32.]

1. Civilization as we know it is inseparable from urban life. Almost all that distinguishes civilized from primitive society is intimately connected with the large agglomerations of population that we call “cities,” and when we speak of “urbanity,” “civility,” or “politeness,” we refer to the manner of life in cities. Even most of the differences between the life of the present rural population and that of primitive people are due to what the cities provide. It is also the possibility of enjoying the products of the city in the country that in advanced civilizations often makes a leisured life in the country appear the ideal of a cultured life.

Yet the advantages of city life, particularly the enormous increases in productivity made possible by its industry, which equips a small part of the population remaining in the country to feed all the rest, are bought at great cost. City life is not only more productive than rural life; it is also much more costly. Only those whose productivity is much increased by life in the city will reap a net advantage over and above the extra cost of this kind of life. Both the costs and the kinds of amenities which come with city life are such that the minimum income at which a decent life is possible is much higher than in the country. Life at a level of poverty which is still bearable in the country not only is scarcely tolerable in the city but produces outward signs of squalor which are shocking to fellow men. Thus the city, which is the source of nearly all that gives civilization its value and which has provided the means for the pursuit of science and art as well as of material comfort, is at the same time responsible for the darkest blotches on this civilization.

Moreover, the costs involved in large numbers living in great density not only are very high but are also to a large extent communal, i.e., they do not necessarily or automatically fall on those who cause them but may have to be borne by all. In many respects, the close contiguity of city life invalidates the assumptions underlying any simple division of property rights. In such conditions it is true only to a limited extent that whatever an owner does with his property will affect only him and nobody else. What economists call the “neighborhood effects,” i.e., the effects of what one does to one’s property on that of others, assume major importance. The usefulness of almost any piece of property in a city will in fact depend in part on what one’s immediate neighbors do and in part on the communal services without which effective use of the land by separate owners would be nearly impossible.

The general formulas of private property or freedom of contract do not therefore provide an immediate answer to the complex problems which city life raises. It is probable that, even if there had been no authority with coercive powers, the superior advantages of larger units would have led to the development of new legal institutions—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 rights to the use of smaller units, who, within the framework determined by the former, would be free to decide on particular issues. In many respects the functions which the organized municipal corporations are learning to exercise correspond to those of such a superior owner.

It must be admitted that, until recently, economists gave regrettably little attention to the problems of the co-ordination of all the different aspects of city development.[1] Though some of them have been among the foremost critics of the evils of urban housing (some fifty years ago a satirical German weekly could suggest that an economist be defined as a man who went around measuring workmen’s dwellings, saying they were too small!) so far as the important issues of urban life are concerned, they have long followed the example of Adam Smith, who explained in his lectures that the problem of cleanliness and security, “to wit, the proper method of carrying dirt from the streets, and the execution of justice, so far as it regards regulations for preventing crimes or the method of keeping a city guard, though useful, are too mean to be considered in a general discourse of this kind.”[2]

In view of this neglect by his profession of the study of a highly important subject, an economist perhaps ought not to complain that it is in a very unsatisfactory state. Development of opinion in this field has, in fact, been led almost exclusively by men concerned with the abolition of particular evils, and the central question of how the separate efforts are to be mutually adjusted has been much neglected. Yet the problem of how the effective utilization of the knowledge and skill of the individual owners is to be reconciled with keeping their actions within limits where they will not gain at somebody else’s expense is here of peculiar importance. We must not overlook the fact that the market has, on the whole, guided the evolution of cities more successfully, though imperfectly, than is commonly realized and that most of the proposals to improve upon this, not by making it work better, but by superimposing a system of central direction, show little awareness of what such a system would have to accomplish, even to equal the market in effectiveness.

Indeed, when we look at the haphazard manner in which governments, with seemingly no clear conception of the forces that determined the development of cities, have generally dealt with these difficult problems, we wonder that the evils are not greater than they are. Many of the policies intended to combat particular evils have actually made them worse. And some of the more recent developments have created greater potentialities for a direct control by authority of the private life of the individual than may be seen in any other field of policy.

2. [RENT CONTROL] We must first consider a measure which, though always introduced as a device to meet a passing emergency and never defended as a permanent arrangement, has in fact regularly become a lasting feature and in much of western Europe has probably done more to restrict freedom and prosperity than any other measure, excepting only inflation. This is rent restriction or the placing of ceilings on the rents of dwellings. Originally introduced to prevent rents from rising during the first World War, it was retained in many countries for more than forty years through major inflations, with the result that rents were reduced to a fraction of what they would be in a free market. Thus house property was in effect expropriated. Probably more than any other measure of this kind, it worsened in the long run the evil it was meant to cure and produced a situation in which administrative authorities acquired highly arbitrary powers over the movement of men. It also contributed much toward weakening the respect for property and the sense of individual responsibility. To those who have not experienced its effects over a long period, these remarks may seem unduly strong. But whoever has seen the progressive decay of housing conditions and the effects on the general manner of life of the people of Paris, of Vienna, or even of London, will appreciate the deadly effect that this one measure can have on the whole character of an economy—and even of a people.

In the first place, any fixing of rents below the market price inevitably perpetuates the housing shortage. Demand continues to exceed supply, and, if ceilings are effectively enforced (i.e., the appearance of “premiums” prevented), a mechanism for allocating dwelling space by authority must be established. Mobility is greatly reduced and in the course of time the distribution of people between districts and types of dwellings ceases to correspond to needs or desires. The normal rotation, in which a family during the period of full earning power of the head occupies more space than a very young or retired couple, is suspended. Since people cannot be ordered to move around, they just hold on to what they have, and the rented premises become a sort of inalienable property of the family which is handed down from generation to generation, irrespective of need. Those who have inherited a rented dwelling are often better off than they would be otherwise, but an ever increasing proportion of the population either cannot get a separate dwelling at all or can do so only by grace of official favor or by a sacrifice of capital they can ill afford or by some illegal or devious means.[3]

At the same time, the owner loses all interest in investing in the maintenance of buildings beyond what the law allows him to recover from the tenants for that specific purpose. In cities like Paris, where inflation has reduced the real value of rents to a twentieth or less of what they once were, the rate at which houses are falling into an unprecedented state of decay is such that their replacement will be impracticable for decades to come.

It is not the material damage, however, that is the most important. Because of rent restriction, large sections of the population in Western countries have become subject to arbitrary decisions of authority in their daily affairs and accustomed to looking for permission and direction in the main decisions of their lives. They have come to regard it as a matter of course that the capital which pays for the roof over their heads should be provided free by somebody else and that individual economic well-being should depend on the favor of the political party in power, which often uses its control over housing to assist its supporters.

What has done so much to undermine the respect for property and for the law and the courts is the fact that authority is constantly called upon to decide on the relative merits of needs, to allocate essential services, and to dispose of what is still nominally private property according to its judgment of the urgency of different individual needs. For example, whether “an owner, with an invalid wife and three young children, who wishes to obtain occupation of his house [would] suffer more hardship if his request were refused than the tenant, with only one child but a bed-ridden mother-in-law, would suffer if it were granted”[4] is a problem that cannot be settled by appeal to any recognized principles of justice but only by the arbitrary intervention of authority. How great a power this sort of control over the most important decisions of one’s private life confers on authority is clearly shown by a recent decision of the German Administrative Court of Appeal, which found it necessary to declare as illegal the refusal of a local government labor exchange to find work for a man living in a different area unless he first obtained from the housing authority permission to move and promise of accommodation—not because neither authority was entitled to refuse his request but because their refusal involved an “inadmissible coupling of separate interests of administration.”[5] Indeed, the co-ordination of the activities of different authorities, which the planners so dearly want, is liable to turn what otherwise is merely arbitrariness in particular decisions into despotic power over the whole life of the individual.

3. [PUBLIC HOUSING/ HOUSING SUBSIDIES] While rent restriction, even where it has been in force as far back as most people can remember, is still regarded as an emergency measure which has become politically impossible to abandon,[6] efforts to reduce the cost of housing for the poorer sections of the population by public housing or building subsidies have come to be accepted as a permanent part of the welfare state. It is little understood that, unless very carefully limited in scope and method, such efforts are likely to produce results very similar to those of rent restriction.

The first point to note is that any group of people whom the government attempts to assist through a public supply of housing will benefit only if the government undertakes to supply all the new housing they will get. Provision of only part of the supply of dwellings by authority will in effect be not an addition to, but merely a replacement of, what has been provided by private building activity. Second, cheaper housing provided by government will have to be strictly limited to the class it is intended to help, and, merely to satisfy the demand at the lower rents, government will have to supply considerably more housing than that class would otherwise occupy. Third, such limitation of public housing to the poorest families will generally be practicable only if the government does not attempt to supply dwellings which are both cheaper and substantially better than they had before; otherwise the people thus assisted would be better housed than those immediately above them on the economic ladder; and pressure from the latter to be included in the scheme would become irresistible, a process which would repeat itself and progressively bring in more and more people.

A consequence of this is that, as has again and again been emphasized by the housing reformers, any far-reaching change in housing conditions by public action will be achieved only if practically the whole of the housing of a city is regarded as a public service and paid for out of public funds. This means, however, not only that people in general will be forced to spend more on housing than they are willing to do, but that their personal liberty will be gravely threatened. Unless the authority succeeds in supplying as much of this better and cheaper housing as will be demanded at the rents charged, a permanent system of allocating the available facilities by authority will be necessary—that is, a system whereby authority determines how much people should spend on housing and what sort of accommodation each family or individual ought to get. It is easy to see what powers over individual life authority would possess if the obtaining of an apartment or house were generally dependent on its decision.

It should also be realized that the endeavor to make housing a public service has already in many instances become the chief obstacle to the general improvement of housing conditions, by counteracting those forces which produce a gradual lowering of the cost of building. All monopolists are notoriously uneconomical, and the bureaucratic machinery of government even more so; and the suspension of the mechanism of competition and the tendency of any centrally directed development to ossify are bound to obstruct the attainment of the desirable and technically not impossible goal—a substantial and progressive reduction of the costs at which all the housing needs can be met.

Public housing (and subsidized housing) can thus, at best, be an instrument of assisting the poor, with the inevitable consequence that it will make those who take advantage of it dependent on authority to a degree that would be politically very serious if they constituted a large part of the population. Like any assistance to an unfortunate minority, such a measure is not irreconcilable with a general system of freedom. But it raises very grave problems that should be squarely faced if it is not to produce dangerous consequences.

4. [SLUMS]  The greater earning power and other advantages that city life offers are to a considerable degree offset by its higher costs, which generally increase with the size of the city. Those whose productivity is greatly increased by working in the city will derive a net advantage, even though they have to pay much more for their limited dwelling space and may also have to pay for daily transportation over long distances. Others will gain a net advantage only if they do not have to spend money on travel or expensive quarters or if they do not mind living in crowded conditions so long as they have more to spend on other things. The old buildings which at most stages of the growth of a city will exist in its center, on land which is already in such great demand for other purposes that it is no longer profitable to build new dwellings on it, and which are no longer wanted by the better-off, will often provide for those of low productivity an opportunity to benefit from what the city offers at the price of very congested living. So long as they are prepared to live in them, to leave these old houses standing will often be the most profitable way of using the land. Thus, paradoxically, the poorest inhabitants of a city frequently live in districts where the value of the land is very high and the landlords draw very large incomes from what is likely to be the most dilapidated part of the city. In such a situation property of this sort continues to be available for housing only because the old buildings, with little spent on them for repair or maintenance, are occupied at great density. If they were not available or could not be used in this manner, the opportunities for increasing their earnings by more than the additional costs of living in the city would not exist for most of the people who live there.

The existence of such slums, which in a more or less aggravated form appear during the growth of most cities, raises two sets of problems which ought to be distinguished but are commonly confused. It is unquestionably true that the presence of such unsanitary quarters, with their generally squalid and often lawless conditions, may have a deleterious effect on the rest of the city and will force the city administration or the other inhabitants to bear costs which those who come to live in the slums do not take into account. Insofar as it is true that the slum dwellers find it to their advantage to live in the center of the city only because they do not pay for all the costs caused by their decision, there is a case for altering the situation by charging the slum properties with all these costs—with the probable result that they will disappear and be replaced by buildings for commercial or industrial purposes. This would clearly not assist the slum dwellers. The case for action here is not based on their interest; the problems are raised by “neighborhood effects” and belong to the questions of city planning, which we shall have to consider later.

Quite different from this are the arguments for slum clearance based on the presumed interests or needs of slum dwellers. These pose a genuine dilemma. It is often only because people live in crowded old buildings that they are able to derive some gain from the extra earning opportunities of the city. If we want to abolish the slums, we must choose one of two alternatives: we must either prevent these people from taking advantage of what to them is part of their opportunity, by removing the cheap but squalid dwellings from where their earning opportunities lie, and effectively squeeze them out of the cities by insisting on certain minimum standards for all town dwellings;[7] or we must provide them with better facilities at a price which does not cover costs and thus subsidize both their staying in the city and the movement into the city of more people of the same kind. This amounts to a stimulation of the growth of cities beyond the point where it is economically justifiable and to a deliberate creation of a class dependent on the community for the provision of what they are presumed to need. We can hardly expect this service to be provided for long without the authorities also claiming the right to decide who is and who is not to be allowed to move into a given city.

As happens in many fields, the policies pursued here aim at providing for a given number of people without taking into account the additional numbers that will have to be provided for as a result. It is true that a part of the slum population of most cities consists of old inhabitants who know only city life and who would be even less able to earn an adequate living in rural conditions. But the more acute problem is that raised by the influx of large numbers from poorer and still predominantly rural regions, to whom the cheap accommodation in the old and decaying buildings of the city offers a foothold on the ladder that may lead to greater prosperity. They find it to their advantage to move into the city in spite of the crowded and unsanitary conditions in which they have to live. Providing them with much better quarters at an equally low cost will attract a great many more. The solution of the problem would be either to let the economic deterrents act or to control directly the influx of population; those who believe in liberty will regard the former as the lesser evil.

The housing problem is not an independent problem which can be solved in isolation: it is part of the general problem of poverty and can be solved only by a general rise in incomes. This solution, however, will be delayed if we subsidize people to move from where their productivity is still greater than the cost of living to places where it will be less, or if we prevent from moving those who believe that, by doing so, they can improve their prospects at the price of living in conditions which to us seem deplorable.

There is no space here to consider all the other municipal measures which, though designed to relieve the needs of a given population, really tend to subsidize the growth of giant cities beyond the economically justifiable point. Most of the policies concerning public utility rates which are immediately aimed at relieving congestion and furthering the growth of the outlying districts by providing services below costs only make matters worse in the long run. What has been said of current housing policies in England is equally true about most other countries: “We have drifted into a practice of encouraging financially, out of taxes collected from the whole nation, the maintenance of over-grown and over-concentrated urban fabrics and, in the case of large cities still growing, the continuance of fundamentally uneconomic growth.”[8]

5. [PLANNING/ZONING] 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. Unlike the situation which generally prevails with mobile property, where the advantages or disadvantages arising from its use are usually confined to those who control it, the use made of a piece of land often necessarily affects the usefulness of neighboring pieces. Under the conditions of city life this applies to the actions of private owners and even more to the use made of communally owned land, such as that used for streets and the public amenities which are so essential to city life. In order that the market may bring about an efficient co-ordination of individual endeavors, both the individual owners and the authorities controlling communal property should be so placed as to enable them to take into account at least the more important effects of their actions on other property [Sanjeev: “internalising the negative externalities]. Only when the value of the property of individuals as well as of the city authorities reflects all the effects of the use they make of it, will the price mechanism function as it should. Without special arrangements, this condition will exist only to a limited degree. The value of any piece of property will be affected by the manner in which the neighbors use theirs and even more by the services provided and the regulations enforced by the authorities; and unless the various decisions take these effects into account, there is little likelihood that total benefits will exceed total costs.[9]

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 the 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 mechanism to operate more efficiently by making owners take into consideration all the 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 operates largely through its effects on the market and through the establishing of general conditions to which all developments of a district or neighborhood must conform but which, within these conditions, leaves the decisions to the individual owner, is part of the effort to make the market mechanism more effective.

There is a very different type of control, however, which is also practiced under the name of “town planning.” Unlike the other, this is motivated by the desire to dispense with 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 co-ordinating individual activities,[10] is of this kind. Even where it is not aimed at tying future developments to a preconceived plan which prescribes the use of every piece of land, it tends to lead to this by making the market mechanism increasingly inoperative.

The issue is therefore not whether one ought or ought not to be for town planning but whether the measures to be used are to supplement and assist the market or to suspend it and put central direction in its place. The practical problems which policy raises here are of great complexity, and no perfect solution is to be expected. The beneficial character of any measures will show itself in contributing to a desirable development, the details of which, however, will be largely unpredictable.

The main practical difficulties arise from the fact that most measures of town planning will enhance the value of some individual properties and reduce that of others. If they are to be beneficial, the sum of the gains must exceed the sum of the losses. If an effective offsetting is to be achieved, it is necessary that both gains and losses due to a measure accrue to the planning authority, who must be able to accept the responsibility of charging the individual owners for the increase in the value of their property (even if the measures causing it have been taken against the will of some of the owners) and of compensating those whose property has suffered. This can be achieved without conferring on authority arbitrary and uncontrollable powers by giving it only the right of expropriation at fair market value. This is generally sufficient to enable the authority both to capture any increments in value that its actions will cause and to buy out those who oppose the measure because it reduces the value of their property. In practice, the authority will normally not have to buy, but, backed by its power of compulsory purchase, it will be able to negotiate an agreed charge or compensation with the owner. So long as expropriation at market value is its only coercive power, all legitimate interests will be protected. It will be a somewhat imperfect instrument, of course, since in such circumstances “market value” is not an unambiguous magnitude and opinions about what is a fair market value may vary widely. The important point, however, is that such disputes can be decided in the last resort by independent courts and need not be left to the discretion of the planning authority.

The dangers come largely from the desire of many planners to be released from the necessity of counting all the costs of their schemes. They often plead that if they are made to compensate at market value, the cost of carrying out some improvements becomes prohibitive. Wherever this is the case, it means, however, that the proposed plan should not be carried out. Nothing ought to be treated with more suspicion than arguments used by town planners to justify expropriation below fair market value, arguments regularly based on the false contention that they can thereby reduce the social costs of the scheme. All that such a scheme amounts to is that certain costs will not be taken into account: the planners make it appear advantageous simply by placing some of the costs on the shoulders of private persons and then disregarding them.

Most of what is valid in the argument for town planning is, in effect, an argument for making the planning unit for some purposes larger than the usual size of individually owned property. Some of the aims of planning could be achieved by a division of the contents of the property rights in such a way that certain decisions would rest with the holder of the superior right, [Sanjeev: e.g development rights] i.e., with some corporation representing the whole district or region and possessing powers to assess benefits and charges to individual subowners. Estate development in which the developer retains some permanent control over the use of the individual plots offers at least one alternative to the exercise of such control by political authority. There is also the advantage that the larger planning unit will still be one of many and that it will be restrained in the exercise of its powers by the necessity of competing with other similar units.

To some extent, of course, even competition between municipalities or other political subdivisions will have a similar restraining effect. Town planners, however, frequently demand town planning on a regional or even national scale. It is true that there will always be some factors in planning which only the larger units can consider. But it is still more true that, as the area of unified planning is extended, particular knowledge of local circumstances will, of necessity, be less effectively used. Nation-wide planning means that, instead of the unit of competition becoming larger, competition will be eliminated altogether. This is certainly not a desirable solution. There is probably no perfect answer to the real difficulties which the complexity of the problem creates. But only a method which operates mainly through the inducements and data offered to the private owner and which leaves him free in the use of a particular piece of land is likely to produce satisfactory results, since no other method will make as full use of the dispersed knowledge of the prospects and possibilities of development as the market does. [Sanjeev: auction of development permits is a likely candidate]

There still exist some organized groups who contend that all these difficulties could be solved by the adoption of the “single-tax” plan, that is, by transferring the ownership of all land to the community and merely leasing it at rents determined by the market to private developers. This scheme for the socialization of land is, in its logic, probably the most seductive and plausible of all socialist schemes. If the factual assumptions on which it is based were correct, i.e., if it were possible to distinguish clearly between the value of “the permanent and indestructible powers of the soil,” on the one hand, and, on the other, the value due to the two different kinds of improvement—that due to communal efforts and that due to the efforts of the individual owner—the argument for its adoption would be very strong. Almost all the difficulties we have mentioned, however, stem from the fact that no such distinction can be drawn with any degree of certainty. In order to give the necessary scope for private development of any one piece of land, the leases that would have to be granted at fixed rents would have to be for such long periods (they would also have to be made freely transferable) as to become little different from private property, and all the problems of individual property would reappear. [Sanjeev: The ACT model is pretty much this – that the standard features of property have reappeared] Though we might often wish that things were as simple as the single-tax program assumes, we will find in it no solution to any of the problems with which we are concerned.

6. [BRITISH TOWN AND COUNTRY PLANNING ACT 1947] The administrative despotism to which town planners are inclined to subject the whole economy is well illustrated by the drastic provisions of the British Town and Country Planning Act of 1947.[11] Though they had to be repealed after a few years, they have not lacked admirers elsewhere and have been held up as an example to be imitated in the United States.[12] They provided for nothing less than the complete expropriation of all gains by the owner of urban property from any major change in the use made of his land—and a gain was defined as any increase in the value of the land over what it would be if a change in its use were altogether prohibited, which might, of course, be zero.[13] The compensation for this confiscation of all development rights was to be a share in a lump sum set aside for that purpose.

The conception underlying the scheme was that people should be free to sell and buy land only at a price based on the assumption that the particular piece of land would be permanently devoted to its present use: any gain made from changing its use was to go to the planning authority as the price for the permission to make the change, while any loss caused by a fall in the value of the land in its present use would affect only the owner. In instances where a piece of land had ceased to bring any return in its present use, the “development charges,” as the levy was called, would therefore have amounted to the full value of the land in any new use to which it could be put.

As the authority created to administer these provisions of the law was thus given complete control of all changes in the use of land outside agriculture, it was in effect given a monopoly in deciding the use of any land in Britain for new industrial or commercial uses and complete authority to employ this power to exercise effective control of all such developments. This is a power which, by its nature, cannot be limited by rules, and the Central Land Board entrusted with it made it clear from the beginning that it did not mean to limit itself by any self-imposed rules to which it would consistently adhere. The Practice Notes it issued at the beginning of its activities stated this with a frankness that has rarely been equaled. They explicitly reserved the right to deviate from its announced working rules whenever “for special reasons the normal rules do not apply” and “from time to time to vary [its] policy” and to treat the “general working rule [as] variable if it does not fit a particular case.”[14]

It is not surprising that these features of the act were found unworkable and had to be repealed after seven years and before any of the compensations for the “nationalization of the development value” of all land had been paid. What remains is a situation in which all development of land is by permission of the planning authority, which permission, however, is presumed to be obtainable if the development is not contrary to an announced over-all plan. The individual owner thus again has an interest in putting his land to better use. The whole experiment might be regarded as a curious episode and an illustration of the follies of ill-considered legislation, if it were not in fact the logical outcome of conceptions which are widely held. All endeavors to suspend the market mechanism in land and to replace it by central direction must lead to some such system of control that gives authority complete power over all development. The abortive British experiment has not attracted wider attention because, while the law was in force, the mechanism which its administration required never came into full operation. The law and the apparatus required to administer it were so complex that nobody except the unfortunate few who got caught in its meshes ever came to understand what it was all about.

7. [BUILDING REGULATIONS] Similar to the problems of general town planning in many respects are those of building regulations. Though they do not raise important questions of principle, they must be briefly considered. There are two reasons why some regulation of buildings permitted in cities is unquestionably desirable. The first is the now familiar consideration of the harm that may be done to others by the erection of buildings which constitute fire or health hazards; in modern conditions the people to be considered include the neighbors and all the users of a building who are not occupants but customers or clients of occupants and who need some assurance (or at least some means of ascertaining) that the building they enter is safe. The second is that, in the case of building, the enforcement of certain standards is perhaps the only effective way of preventing fraud and deception on the part of the builder: the standards laid down in building codes serve as a means of interpreting building contracts and insure that what are commonly understood to be appropriate materials and techniques will in fact be used unless the contract explicitly specifies otherwise.

Though the desirability of such regulations can hardly be disputed, there are few fields in which government regulations offer the same opportunity for abuse or have in fact been used so much to impose harmful or wholly irrational restrictions on development and so often help to strengthen the quasi-monopolistic positions of local producers. Wherever such regulations go beyond the requirement of minimum standards, and particularly where they tend to make what at a given time and place is the standard method the only permitted method, they can become serious obstructions to desirable economic developments. By preventing experimentation with new methods and by supporting local monopolies of enterprise and labor, they are often partly to blame for the high building costs and are largely responsible for housing shortages and overcrowding. This is particularly true where regulations not merely require that the buildings satisfy certain conditions or tests but prescribe particular techniques to be employed. It should be especially emphasized that “performance codes” of the former kind impose less restrictions on spontaneous developments than “specification codes” and are therefore to be preferred. [Sanjeev: Here Hayek confirms that performance based regulation is superior to prescriptive] The latter may at first seem to agree more with our principles because they confer less discretion on authority; the discretion which “performance codes” confer is, however, not of the objectionable kind. Whether or not a given technique satisfies criteria of performance laid down in a rule can be ascertained by independent experts, and any dispute, if it arises, can be decided by a court.

Another issue of some importance and difficulty is whether building regulations should be laid down by local or by central authorities. It is perhaps true that local regulations will be more liable to be abused under the influence of local monopolies and are also in other respects more likely to be obstructive. There are probably strong arguments in favor of a carefully thought-out national standard or pattern which local authorities can adopt with whatever modifications seem appropriate to them. In general, however, it seems probable that if the codes are determined locally, the competition between local authorities will bring about a more rapid elimination of obstructive and unreasonable restrictions than would be possible if the codes were uniformly laid down by law for a whole country or large region.

8. [LOCATION OF INDUSTRY] Problems of the kind raised by town planning are likely to assume great importance in the future in connection with the location of industries on a national scale. The subject is beginning to occupy the attention of the planners more and more, and it is in this area that we now encounter most often the contention that the results of free competition are irrational and harmful.

How much is there in this alleged irrationality of the actual location of industry and the supposed possibility of improving upon it by central planning? It is, of course, true that, had developments been correctly foreseen, many decisions about the location of plants would have been different and that in this sense what has happened in the past appears in retrospect as unwise. This does not mean, however, that, with the knowledge which was then available, a different decision could have been expected or that the results would have been more satisfactory if developments had been under the control of a national authority. Though we again have to deal here with a problem wherein the price mechanism operates only imperfectly and does not take into account many things we would wish to see taken into account, it is more than doubtful whether a central planner could guide developments as successfully as the market does. It is remarkable how much the market does accomplish in this respect by making individuals take into account those facts which they do not know directly but which are merely reflected in the prices. The best-known critical examination of these problems has indeed led August Lösch to conclude that “the most important result of this book is probably the demonstration of the surprising extent to which the free forces operate favorably.” He then goes on to say that the market “respects all human wishes, sight unseen, whether these are wholesome or unwholesome” and that “the free market mechanism works much more to the common good than is generally supposed, though with certain exceptions.”[15]


[1] A valuable attempt to remedy this position has recently been made in Ralph Turvey, Economics of Real Property: An Analysis of Property Values and Patterns of Use (London: Allen and Unwin Ltd., 1957). Of earlier works the discussions of local taxation by Edwin Cannan, History of Local Rates in England, in Relation to the Proper Distribution of the Burden of Taxation (2nd ed., much enl.; London: P. S. King and Son, 1912), and his “Memorandum,” in Royal Commission on Local Taxation, Memoranda Chiefly Relating to the Classification and Incidence of Imperial and Local Taxes [Alexander Hugh Bruce Balfour, Baron Balfour, Chairman] (London: Her Majesty’s Stationery Office, 1899) [Cmd. 9528], pp. 160–75, are still among the most helpful on the crucial issues. [See also Cannan’s Answers to the Questions Submitted to Him by the Royal Commission on Local Taxation (London, 1898).—Ed.] See also Jane Jacobs, The Death and Life of the Great American Cities (New York: Random House, 1961).

[2] Adam Smith, Lectures on Justice, Police, Revenue, and Arms: Delivered in the University of Glasgow (delivered in 1763–64) Edwin Cannan, ed. (Oxford: Clarendon Press, 1896), p. 154 [ Liberty Fund edition, Lectures on Jurisprudence, p. 486].

[3] Cf. Milton Friedman and George Joseph Stigler, Roofs or Ceilings? The Current Housing Problem (New York: Foundation for Economic Education, 1946); Bertrand de Jouvenel, No Vacancies (New York: Foundation for Economic Education, 1948); Sir Roy Forbes Harrod, Are These Hardships Necessary? (London: Rupert Hart-Davis, 1947); Frank Walter Paish, “The Economics of Rent Restriction,” Lloyds Bank Review, n.s., 14 (April 1950): 1–17, reprinted in Frank Walter Paish, The Post-War Financial Problem, and Other Essays (London: Macmillan, 1950), pp. 74–93; Wilhelm Röpke, Wohnungszwangswirtschaft—ein europäisches Problem (Düsseldorf: Deutsche Wohnungswirtschaft, 1951); Alfred Amonn, “Normalisierung der Wohnungswirtschaft in grundsätzlicher Sicht,” Schweizer Monatshefte, 33 ( June 1953): 129–138; and my own earlier essays, Das Mieterschutzproblem: nationalökonomische Betrachtungen [ The Rent-Control Problem: Political-Economic Considerations] (Vienna: Steyrermühl Verlag, 1929) and “Wirkungen der Mietzinsbeschränkungen” [ The Repercussions of Rent Restrictions], Schriften des Vereins für Sozialpolitik, 182 (Leipzig: Duncker und Humblot, 1930), pp. 253–70.

[4] The illustration is given by Frank Walter Paish in his essay, “The Economics of Rent Restriction,” p. 4; reprinted in The Post-War Financial Problem, and Other Essays, pp. 77–78.

[5] Ernst Forsthoff, Lehrbuch des Verwaltungsrechts. Vol. 1: Allgemeiner Teil (Munich: C. H. Beck,1950), p. 222. [ The citation to which Hayek refers reads: “Mit anderen Worten: die Verwaltungsbehörde darf die Erledigung ihrer Obliegenheiten nicht mit den Interessen oder Ansprüchen anderer Behörden oder mit der Erledigung anderer Verwaltungszwecke verkuppeln, sofern nicht eine Verbindung in der Sache selbst gegeben ist.” (“In other words, the administrative authority may not couple the execution of its responsibilities with the interests or demands of other authorities or with the pursuit of other administrative goals, unless such a coupling follows from the matter itself.”)—Ed.]

[6] Only recently have determined, systematic efforts been made in both Great Britain and Germany to abolish the whole system of rent controls. Even in the United States they still exist in New York City. [ In 1969 New York City enacted a rent stabilization law to replace the older rent control law. As rent controlled apartments in New York City become vacant, they normally become subject to rent stabilization, which limits the rate of rent increases and stipulates the grounds on which a landlord may evict a tenant, including the manner of eviction. Allowable rent increases are determined by a Rent Guidelines Board. In 1993, high-rent units were decontrolled.—Ed.]

[7] This possibility has not infrequently been used in various parts of the world to drive out unpopular racial minorities.

[8] Sir Frederick Osborn, “How Subsidies Distort Housing Development,” Lloyds Bank Review, n.s., 36 (April 1955): 36.

[9] On these problems see Ralph Turvey, Economics of Real Property, and Allison Dunham, “City Planning: An Analysis of the Content of the Master Plan,” Journal of Law and Economics, 1 (1958): 170–86.

[10] The extent to which the movement for town planning, under the leadership of such men as Frederick Law Olmsted, Patrick Geddes, and Lewis Mumford, has developed into a sort of anti-economics would make an interesting study. [ Frederick Law Olmsted, Jr. (1870–1957), the son of America’s greatest landscape architect and a founder of the American town planning movement; Patrick Geddes (1854–1932), Scottish biologist and an outspoken adherent of urban planning; Lewis Mumford (1895–1990), social critic who developed a theory that urban sprawl, the undirected and uncontrolled growth of cities, was responsible for most modern social ills.—Ed.]

[11] It should perhaps be said, in exculpation of the British economists, that it would hardly have been possible for these absurdities ever to have become law if the decisive stage of the preparation of the legislation had not taken place at a time when the economists were almost entirely occupied with the war effort, and when the town planners had the time and a free field to put through their conception of a better postwar world. It is hardly an exaggeration to say that, at the time the act was passed, scarcely anybody in Parliament understood its implications and that probably nobody at all foresaw that the responsible minister would use the powers given to him to decree a complete confiscation of the development gain. See on the act Sir Arnold Plant, “Land Planning and the Economic Functions of Ownership,” The Journal—Chartered Auctioneers and Estate Agents Institute, 29 (1949): 284–305 [ While the title of the volume in which this article appears is as shown, this varies slightly from those of subsequent numbers, which carry the title The Journal of the Chartered Auctioneers’ and Estate Agents’ Institute.—Ed.]; and, in addition to Ralph Turvey, Economics of Real Property, see his article, “Development Charges and the Compensation-Betterment Problem,” Economic Journal, 63 (1953): 299–317, and my article “A Levy on Increasing Efficiency,” Financial Times (London), pt. 1 (April 26, 1949), “The Economics of Development Charges,” p. 4; pt. 2 (April 27, 1949), “Detrimental Effects of Development Charges,” p. 4; and pt. 3 (April 28, 1949), “Too Little Evidence of Planning,” p. 4.

[12] Charles Monroe Haar, Land Planning Law in a Free Society: A Study of the British Town and Country Planning Act (Cambridge, MA: Harvard University Press, 1951); cf. my “Review of C. M. Haar’s Land Planning Law in a Free Society,” University of Chicago Law Review, 19 (1952): 620–26; reprinted as an Appendix under the title “The Economics of Development Charges,” in Studies in Philosophy, Politics and Economics (Chicago: University of Chicago Press, 1967), pp. 331–38.

[13] Strictly speaking, this act was implemented by the responsible minister who had been authorized to fix the development charges at some percentage of the development gain and chose to fix them at 100 per cent.

[14] Central Land Board, Practice Notes (First Series): Being Notes on Development Charges Under the Town and Country Planning Act, 1947 (London: His Majesty’s Stationery Office, 1949), Preface, pp. ii–iii.

[15] August Lösch, The Economics of Location, William Henry Woglom, trans. (New Haven: Yale University Press, 1954), pp. 343–44.

Sanjeev Sabhlok

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