Category: Public policy

EXTRACTS FROM Lawrence W. C. Lai’s Hayek and town planning: A note on Hayek’s views towards town planning in The Constitution of Liberty, Environment 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.

In one word: PRIVATISATION

How do you privatise trains? That sounds implausible. Well, Japan did it in 1987.

in 1987, the government privatized the Japanese National Railways (JNR), which operated every type of transit except trams and inner-city metros. JR East, JR Central, and JR West, the three spin-offs operating around Tokyo, Nagoya, and Osaka, respectively, emerged healthy and profitable. They were able to pay back their construction debt and make capital improvements to their networks, reversing the stagnation and decline that JNR had seen over the previous decade. [Source]

While this experiment has been a resounding success in dense areas of Japan, it is floundering in remote regions:

The turnaround of Japan Railways group firms servicing Honshu and Kyushu over the past 30 years paints the 1987 privatization and breakup of the Japanese National Railways as a successful reform of the state-run train operator that was incurring more than ¥1 trillion in losses each year and piling up mountains of debt. However, the success of JR companies that benefit from the popular shinkansen superexpress services, profitable local train operations for urban commuters as well as diversification of their business comes in sharp contrast to the problems confronting group firms in rural regions where many train services remain in the red — a problem that threatens to get worse across the country as Japan’s population continues to shrink. [Source]

This article is a pretty good summary of the situation.

KEY EXTRACTS FROM AN ACADEMIC PAPER

The paper – below – explains some more details (MIZUTANI, F., & NAKAMURA, K. (1997). PRIVATIZATION OF THE JAPAN NATIONAL RAILWAY: OVERVIEW OF PERFORMANCE CHANGES. International Journal of Transport Economics / Rivista Internazionale Di Economia Dei Trasporti,24(1), 75-99)

JUST LIKE INDIA: Skewed incentives and dirty toilets

The public corporation system, too, led to the untenable financial posi­tion JNR found itself in by the 1980s. This system ensures that the govern­ment completely backs the corporation, no matter how inefficiently it is run. At JNR, there was almost no concern with the possibility of bank­ruptcy. Public ownership hindered structural adjustment, damaged work incentives, and invited political involvement. The sharp decline in efficiency over the years can be attributed mainly to the inherent characteristics of a public corporation: lack of a reward system, limited interest in restructur­ing, and conflict between economic and social objectives. JNR tended to be slow to innovate and to respond to changes in customer preferences, thus rapidly losing its competitive edge.

The predominant thought at JNR was that the government would make up the deficits even if JNR were not profitable. Lack of cost consciousness was evident in, for example, the number of JNR employees. The total number of employees peaked at a staggering 400,000, clearly excessive. JNR was almost powerless to reduce the number, however, due to the strained relations between management and the labor unions. Productivity problems were a constant source of conflict, with workers balking at the periodic large-scale productivity improvement drives imposed by their managers. Embittered relations hampered any efforts at reform.

Government interference also contributed to the inefficiency that wors­ened JNR’s financial situation. Details of fares, investment plans, employee wages, and personnel matters were highly controlled by both the govern­ment and the Diet. Price adjustment, in particular, which was subject to gov­ernment approval, incited fierce controversy. The nationwide uniform fare system for universal service was also responsible for widening unequal cost burdens, as it did not take into account differences in costs according to region. Furthermore, even though some unprofitable rail lines were con­verted to bus routes based upon reconstruction plans, this restructuring proc­ess was often interrupted by conflicts among vested interests.

Rail users themselves were too demanding. Because JNR was a govern­ment-owned entity, citizens took it for granted that the company was there to serve their every need. They pressured Diet members to provide rail services where there was clearly insufficient need, without consideration of the poor financial state of JNR. Rails were constructed in rural areas where there was no possible justification in economic terms for such an undertak­ing.

After privatisation, dirty toilets were cleaned up

A typical case was the campaign to clean up dirty, malodorous station toilets which had typified JNR’s lax attitude toward satisfying rail users. What might seem a minor detail — clean toilets — clearly left users with a more positive image of the privatized JRs.

MASSIVE INCREASES IN PRODUCTIVITY AFTER PRIVATISATION

The productivity level in the before-privatization was 510 thousands passenger kilometres per em­ployee and 1,114 thousands ton kilometres per employee, but these in­creased to 1,443 thousands passenger kilometres per employee and 2,385 thousands ton kilometres per employee. Although the annual growth rate of labor productivity was highest in the during-privatization at about 21 per cent for passenger and 15 per cent for freight transportation, it continued to increase, though less dramatically, in the after-privatiza­tion period.

I used to accept the received wisdom that reputation is private property. But now that I’ve started analysing it in some detail – given the massive harmful effects it has on the economy – it has become increasingly clear to me that it is not private property.

1. Widely held view that reputation is private property

It is quite common to hear that reputation is a form of private property – or that one has a claim on the fruits of one’s reputation as if it were a real asset.

For instance, Fred Foldvary, a lecturer in economics at San Jose State University, California and a research fellow at The Independent Institute, noted that: Defamation is theft of income from one’s lost reputation.

Tim Wilson, a Human Rights Commissioner in Australia wrote that: “In broad principle, defamation law comes from a direct conflict between free speech and people’s ownership over their earned reputation – essentially a property right. Defamation law makes it justifiable to limit speech when it unjustly harms that reputation and the right for an individual to earn from it.” .

Law journals regularly argue that reputation is private property, e.g. this article: Reputation as Property in Virtual Economies and this one that says: “the law of defamation …  protects a property right in reputation” [Source]

2. But reputation is not private property – the proof, below.

First, we need to consider how reputation is built.

Reputation can be considered to be a public “Producer Blockchain” built from information blocks generated by the producer’s consumers.

The key properties of reputation can be seen from the diagram below:

An information “block” about a transaction and the producer’s characteristics is relayed to the other consumers (the market) by each consumer

These other consumers do not take this information at face value and validate it before including it in the “blockchain”.

This validated “blockchain” is then owned by everyone in the society excluding the producer. It is about the producer, i.e. others’ opinions. It cannot possibly be owned by the producer. No producer has grounds to lay claim over this information. He can, at best, influence it through his output/conduct. At no stage does P have a claim for compensation for “damage” to “his” reputation.

Therefore we clearly see that reputation is not private property.

Murray Rothbard was crystal clear about this in his Libertarian Manifesto which means I should probably pay more attention to his views.

“It has generally been held legitimate to restrict freedom of expression if that speech has the effect of either falsely or maliciously damaging the reputation of another person. What the law of libel and slander does, in short, is to argue a “property right” of someone in his own reputation. Yet someone’s “reputation” is not, and cannot be “owned” by him, since it is purely a function of the subjective feelings and attitudes held by other people. But since no one can ever truly “own” the mind and attitude of another, this means that no one can literally have a property right in his “reputation”. A person’s reputation fluctuates all the time, in accordance with the attitudes and opinions of the rest of the population. Hence, speech attacking someone cannot be an invasion of his property right and therefore should not be subject to restriction or legal penalty.”

Further, Kate Galloway, an academic, writes:

“The foundation of this idea of enforceability is that if we have property in a thing, we can exclude others from it. [Thus] if through our endeavours we develop a reputation that puts us in good standing in the community and may even be of monetary (exchange) value in terms of job prospects, or friendships or business opportunities, this reputation is not property. It may be protected by law, but it is not property.”

If this interpretation is correct, then many implications flow from it, in particularly, regarding defamation law.

IMPLICATIONS

We can see from the blockchain analogy that:

1) Consumers verify before including inconsistent information. They do not blindly accept the information that others provide. They validate it (somewhat like a blockchain node). If the information they receive is inconsistent with information from other consumers, they will check it thoroughly before including it in their copy of the blockchain.

2) If C1 provides false information, P can put out a public clarification (this is very easy through blogs and advertising). Two things can happen:

• If C1 is a honest consumer, he will accept the true information and revise his “information block”
• If C1 is malicious, he will become known to the community as a liar.

There is therefore no case for defamation law applying at least to any commercial activity.