This series looks at some of the ways that people organize themselves to live alongside each other in cities. Part 1 looks at inherent problems with top-down planning, and this part will expand on this issue with the specific problems of pricing government-owned land.
Prices are an emergent order that convey information beyond what is available to any individual. Entrepreneurs are incentivized by profits to provide consumers with the goods that they are looking for. The market is constantly moving toward equilibrium as consumer preferences change and entrepreneurial discovery takes place. With all of these moving parts, equilibrium prices will never be achieved, but we will always be moving toward equilibrium as entrepreneurs respond to profit and loss feedback. For me, the clearest description of this market process is Israel Kirzner’s Competition and Entrepreneurship.
The essay “I, Pencil” by Leonard E. Read provides a simple illustration of the dispersed knowledge that prices capture. He points out that there is not a single person on earth with the knowledge to construct a pencil, one of the simplest consumer goods available. Prices allow for this division of labor. While the land market is distinct from manufactured goods, prices play an equally important role in allocating land use. The knowledge of this highest value use is likewise disperse and tacit, so no one decision-maker has the necessary information to allocate land efficiently.
The problem of government pricing is perhaps most severe in below market-rate or zero-price street parking, but it can also be seen in open space, where the value of the land that is dedicated to (often unused) public space is not considered. In The Death and Life of Great American Cities, Jane Jacobs criticizes government-provided land use in the form of city sidewalks that are too narrow, parks that are too large or not visible enough to public view, and blocks that are too long.
Many have disagreed with her on all of the specifics of these criticisms, but there is little doubt that cities make mistakes in land use allocation. Because cities don’t make entrepreneurial profits or losses on the land use allocation that they select, the process of making improvements is slowed and may even go the wrong way. The way to test a better allocation of land is by allowing the price system to function. Prices provide the information for the profit and loss feedback system to tell entrepreneurs whether or not they are doing a good job, and when a city owns land and determines its use, this feedback is not available.
When we see parks that go unused or public spaces that create opportunities for crime rather than add value, the absence of profit and loss is in part to blame. While a city can set prices for government-owned land, it cannot be an economic actor like any other because it acts outside market incentives. When a city sets prices for the land that is owns, this is an improvement over the zero-price alternative, but the market process cannot be introduced to improve land use for property that remains government-owned.