Urban Sprawl

There are so many things I want to write about. The political chatter on facebook has reached a fever pitch. Some things people have written have been thoughtful and poignant but overall the medium does not seem to lend itself to a quality forum for discussion. I hope to write a little bit about the political climate soon. In addition, there will soon be posts on the "Liberty and the Market Process" colloquium readings and discussion from last week, however, studies come first. The last midterm for the fall semester is on Urban and Regional Planning and while working through the class notes I thought it was a good opportunity to just post on some topics here. This particular post is on Urban Sprawl (more posts on cities to come!).

What is Urban Sprawl? Why is it considered a problem?

Urban sprawl refers to the "excessive" spatial growth of cities. Urban sprawl is believed to be problematic because it represents market failure. There are three common market failures that are discussed: (1) The positive externality of open space, (2) The negative externality of pollution, (3) The negative externality of millage rates. I discuss each of these in turn. First, open space is valued through the market based on its productive use, but, the productive use does not capture the aesthetic value that urban populations place on the open space. Because new developments do not account for this positive externality open space is under-provided in the market. Second, because people are locating further from their occupations there are longer commutes associated with sprawl. The costliness of these longer commutes is amplified when we consider the congestion of roads which lead to even longer commutes. Third, when housing sprawls further from the city new infrastructure like roads, sewer, electric must be built to accommodate the new structures. But, because property taxes do not fully cover the large up-front cost of this infrastructure this places a burden on other taxpayers.

What does it mean for something to be excessive? That implies there is an optimal amount of city growth. This is somewhat difficult concept to wrap your arms around because first you need a model to tell you what is optimal and second you are going to have serious measurement problems.

What policy prescriptions are associated with fixing Urban Sprawl?

There is a policy prescription associated with each of these market failures. With respect to open space the thought is that developers are not accounting for this aesthetic benefit therefore developers should pay a development tax equal to the cost on society of not having the open space. To handle the pollution caused through commute times one thought is that people could pay time-of-day tolls to alleviate congestion during rush hour. Or people could pay tolls during all the time which would increase the commute cost giving people a reason to drive less. With the millage externality up-front costs can be managed through the implementation of an impact fee where the developer pays a fee equal to the cost of the new infrastructure. This means that property taxes will be able to cover the maintenance of that infrastructure. Finally, the policy often provided by Urban Planners is zoning and urban growth boundaries (UGB). Both of these policies are attempts to restrict "excessive growth". Zoning allows for particular land uses in a given area while UGBs draw a circle around the current land use and do not allow for development past the boundary (until the planners decide the boundary needs to be expanded)

What are the problems associated with these policies? Which policies seem to have the most merit?

All of these prescriptions are wrought with problems but some are better than others. There are significant measurement problems with the valuation of open space beauty.  Even if open space could be "socially valued" you might think that if open space is valuable to city dwellers then they can contribute their money to conservation nonprofits that purchase and preserve land.

With respect to the UGBs there is an arbitrariness in determining the boundaries.  Moreover, to the extent that land at the boundaries have more access to open space and open space is valuable this should reflect in their housing value. However, because UGBs are subject to change this person will likely lose value on their home and engage in rent-seeking behavior to try to restrict growth to maintain their housing values. The existence of a UGB creates a bootleggers and baptists public choice problem where current residents desire to restrict land use to keep their housing prices artificially high while planners and environmentalists like it because it decreases sprawl.

Zoning also has similar problems where it makes land artificially scarce. Moreover, the creation of a zoning bureaucracy as well as the rent-seeking that ensues from the bureaucracy to the state and local governments as well as rent-seeking from developers is a drain on resources that could have been allocated to more productive uses. With respect to urban sprawl and zoning it seems to be a case where the cure is worse than the disease.

The bottom line on UGB and Zoning is that there are possible benefits to society; but, these benefits are difficult to measure. Moreover, these policies are difficult to implement in an appropriate manner that does not perturb market allocations of housing goods too much. To the extent we value the ability for people to have affordable rent or housing these policies are quite detrimental. To say the least, it is unclear that benefits exceed costs. 

The congestion fee and impact fee ideas have some merit because their administrative costs would be relatively low with both. Also measurement of the impact fee should be relatively easy since there is a more concrete idea about how much infrastructure costs. Also, even though congestion as a social cost would be difficult to measure the price can be manipulated to search out what price produces a good flow of traffic (again, there are measurement problems, "what is a good flow?") . . .

I think the post has gotten long enough. I'll post on another Urban topic tomorrow.

The Market and Entrepreneurship

These past few papers have feverishly banged at the door shouting, "Economics is not a science based entirely on allocations!" This new round of articles from Hayek and Kirzner are making the same point, however, with different emphasis. Rather than a particular focus on the economic calculation problems of social planners ---the aim of the previous articles by Mises and Hayek (I will write about these soon) --- these articles attempt to articulate the processes inside of markets.

All intro students of economics are acquainted with the model of perfect competition. The intersection of supply and demand curves determines equilibrium price and quantity. However, Hayek and Kirzner do not portray the market with the stillness and tranquility of equilibrium, but, a market in which entrepreneurs are restless in their attempts at improvement. Ironically, this competitive process (where each entrepreneur attempts to provide better products at lower costs) is completely removed from the competitive model. All of the action, so to speak, occurs outside of the model.

This might seem like an academic exercise and you might be asking yourself, "So what?" The big point here is that in our focus on outcomes we turn our attention away from process. Turning our backs on process is detrimental because there are good economic lessons to be learned from the process. For Hayek the "good economics" being missed by the model of perfect competition is discovery. Discoveries and innovations lead us to new products and decrease costs of providing products. But, these innovations and dynamics which are the engine of growth in our economy are not captured in the model of perfect competition ---not even close.
 
//Start wonkiness
Our mathematical models are completely incapable of handling the Austrian critiques for two reasons: (1) Disequilibrium behavior, and (2) Surprise. First, there is a French word used in general equilibrium analysis called "tatonement" which translates as groping. Agents are always groping towards an equilibrium resting place. Like water poured into a bowl it will stop swirling once it reaches a resting place. Bottom line, we always model things as moving towards equilibrium and do not know how to model things moving out of equilibrium. Second, our rational expectations models presume that there is no surprise. With respect to discovery this means that if you want to build innovation in a model you must presume a probability distribution over the arrival of new inventions. But, how do you know the probability distribution? At present, this is the best we can do. In a rational expectations framework you cannot start with innovations having a measure of zero and then suddenly have a non-zero measure.
//End wonkiness

Akin to the criticism Hayek and Kirzner levy against the competitive model I have a similar example culled from game theory. George Akerlof's work on asymmetric information  is a canonical model in economic theory where the common example is used cars. Imagine you are shopping for automobiles at a used car lot.
You are not certain whether you're buying a good car or a lemon. Since you are a rational shopper you form an expectation about the value of the car.  However, the dealer knows this expectation is less than the most valuable car on his lot. Thus, he removes that car from the set of cars he offers you. Now you form a different expectation about the value of the remaining cars. The dealer continues to remove cars he values more than your expectation. This keeps going and can result in an equilibrium of complete market failure. However, we observe in the real world that used car dealers have developed warranties to overcome some of these problems. Other entrepreneurs have developed ideas like Carfax.

The point? Entrepreneurs turn Akerlof's lemons into lemonade.

This point is not as evident when we focus on equilibrium rather than process.

The Sabbath (Book Review)

The Sabbath by Abraham Heschel tip-toes the line of soul and mind. The dream-like prose is packed with zeal for a day he calls, "a palace in time":

The seventh day is a mine where spirit's precious metal can be found with which to construct a palace in time, a dimension in which the human is at home with the divine; a dimension in which man aspires to approach the likeness of the divine. For where shall the likeness of God be found? There is no quality that space has in common with the essence of God. There is not enough freedom at the top of the mountain; there is not enough glory in the silence of the sea. Yet the likeness of God can be found in time, which is eternity in disguise.

According to Heschel there are two divisions of the world: space and time. We are well acquainted with space, creating and toiling, but, we are less familiar with time. First, we start with space. Our endeavors in space can help us understand God as Creator. For example, I built Adirondack chairs the other week, therefore, I created on a much smaller scale. Furthermore, I can tell you, there is satisfaction in the toil and I feel a connection to the chairs built. In this sense, with this small metaphor I gain insight into God. Yet, as Heschel points out the likeness of God is too grand to be captured in an object.

What Heschel spends much more pages writing about is time. Writing about the nature of time Heschel looks to the Bible and ancient rabbis. Genesis 2:2 reads, "On the seventh day God finished his work," Exodus 20:11 reads, "In six days the Lord made the heaven and earth." Wait a minute . . . He made the heaven and the earth in 6 days but finished on the 7th? The rabbi's resolved this by stating that menuha was created on the Sabbath. Menuha is not an object like my Adirondack chair that can be grasped, rather, Heschel states menuha means something akin to "tranquility, serenity, peace, and repose". God created an architecture in time and menuha is the special attribute of the seventh day.

The fact that God blessed the seventh day, and not the other days, should hint that the seventh day is special. What this means is that time is not homogeneous ---some time is different than other time. What I take this to mean is, there is time for creating and time for remembering that we were created. On the seventh day we remember our relationship with God, that remembrance is a refuge from a fury of sound and distraction. What is more, this remembrance carries us through the rest of the week.

Heschel regales the reader with stories of Jewish people practicing the Sabbath and embracing the day with vigor and longing. There are many stories that could be presented here, but, I will share only one,

Rabbi Solomon of Radomsk once arrived in a certain town, where, he was told, lived an old woman who had known the famous Rabbi Elimelech. She was too old go out, so he went to see her and asked her to tell him what she knew about the great Master. ---I do not know what went on in his room, because I worked as one of the maids in the kitchen of his house. Only one thing I can tell you. During the week the maids would often quarrel with one another, as is common. But, week after week, on Friday when the Sabbath was about to arrive, the spirit of the kitchen was like the spirit on the eve of the Day of Atonement. Everybody would be overcome with an urge to ask forgiveness of each other. We were all seized by a feeling of affection and inner peace.

This book gave me a passion and appreciation for the Sabbath that I did not have before reading this book. Heschel (below) at one point asks, ". . . is there any institution which holds out greater hope for man's progress than the Sabbath?"

This is a great question. Given the level of pressure and stress, which negatively impacts many people's lives, it would seem we need to learn the discipline of rest. Not merely diversion but a palace in time that anchors our identity as image bearers of God.

Symbiotics, I mean, Economics

Earlier this week a package arrived. It was heavy like a box of rocks but contained about twelve books and a large packet of reading material. The Mercatus Center holds its first meeting for the Adam Smith fellows in mid-October and there is quite a bit of material to digest before we meet. So, I thought the blog would be an opportunity to (A) Pass along what I am learning, and (B) Serve as a repository so I don't forget what I'm learning.

This post will be a brief discussion of the first two articles in the packet Lord Lionel Robbins on "The Significance of Economic Science" circa 1935 and a later 1964 vintage by Nobel-Laureate James Buchanan called "What Should Economists Do?". In historical context both of these articles have important messages about economic method that are still relevant for modern discourse.

Robbins' central point was that economics is incapable of conducting interpersonal comparisons of utility. Other scholars at the time were using the law of diminishing marginal utility as justification for the redistribution of wealth. While Robbins upheld the belief that we could measure marginal changes for an individual he eschewed the notion that we could compare between individuals.

For example, at the extreme, there are two brothers, one named Rich N. Come and the other named Noel N. Come. Robbin's contemporaries said that Rich received less satisfaction from $1 more money than Noel received from that same dollar. Thus, the government could transfer wealth from Rich to Noel because that would result in higher social utility. However, Robbins' main point is that this justification relies on knowledge of the magnitudes of utility. In fact, there is no science that can accurately obtain such magnitudes.  Side Question: Does the literature on happiness and advances in neuroeconomics hold out hope for measuring such things? (To be discussed later)

Additionally, Robbins attempted to make a sharp distinction between (1) The objective function and (2) The economical way in which that objective is obtained. As economists Robbins said we have no way of knowing what is the best objective: more equal distribution of wealth, more meritorious distribution of wealth, etc. But, given a particular objective we should be able to talk about the lowest cost way to achieve that goal. He writes, "Without economic analysis it is not possible to rationally choose between alternative systems of society".

Buchanan uses Robbins' arguments to discuss how economists have been obsessed with the allocation of scarce resources among competing ends. Briefly, he discusses how his contemporaries got around Robbins' problem of interpersonal utility comparisons. These people created mathematical constructions called "social welfare functions" to arrive at aggregate levels of utility. While Buchanan understands the reason economists have focused on allocation he endeavors to suggest that economists would gain greater insight about human nature through studying the process of exchange ---not outcomes alone.

One passage I found particularly interesting, and summarizes his thoughts nicely, was his discussion about the name "economics". Buchanan writes, 

"Were it possible to wipe the slate clean [change the name economics to something else], I should recommend . . . "symbiotics" . . . Symbiotics is defined as the study of association between dissimilar organisms, and the connotation of the term is that the association is mutually beneficial to all parties. This conveys more or less precisely the idea that should be central to our discipline. It draws attention to a unique sort of relationship that which involves the cooperative association of individuals, one with another, even when the individual interests are different."

In 1964 Buchanan made arguments that our focus on outcomes was leading us to become a backyard of mathematics. However, when we focused on the process we learned something useful. How are human actors considering costs and benefits? What social or legal rules are salient in their decision-making process? What social or legal rules will people invent to overcome problems? For example, Buchanan said that the free-rider problem in public goods provision could be overcome through the creation of a constitution that had coercive power. He thought this was an economic action where at least a subset of people were able to pen a mutually beneficial agreement. This was symbiotics. 

Since Buchanan wrote this article there has been some progress towards becoming a process-oriented rather than allocation-oriented science. I will expound on this in a future post.  The question I'm asking myself now is, "Why did the Mercatus Center want us to read these?" I think that the overall goal is to get us to think about the market as an emergent process rather than something that is "in equilibrium". Such a framework for thought would put emphasis on institutions as well as entrepreneurial action (either new products or via collective action). In essence, focus on the process puts humans, not allocations, at the center of economics. I think this will prove to be a useful window through which we can look at the world.

This is not esoteric economics but matters in the following sense. If we are a science that focuses on outcomes without much regard for the process in which outcomes happen we will be less attuned to opportunity costs and unintended consequences, two things we profess to teach our students (and on this blog we have professed could help make the world a better place). More to come.

Christians and Merit

"Serious Christians have to struggle continuously against the temptation to view 'merit' uncritically."

Read more, much more, at this wonderful essay by Walter Russell Meade.

Thanks to Instapundit for the tip.

Elinor Ostrom

There was sad news this morning that Nobel laureate political scientist Elinor Ostrom has passed away (she won the prize in Economic Science in 2009). Prof. Ostrom pioneered a fusion of field-based, almost anthropological, research with the experimental methods of her colleagues at Indiana, notably Prof. James Walker, to teach us much about how real people solve real commons dilemmas problems. She wasn't a Polyanna; common dilemmas indeed are problems and sometimes failures occurs. But she also documented the ability of people with local knowledge and local institutions to do much more than those textbook models which read something along the lines of "this is market failure... the government must intervene to fix the problem." She called the focus of her model "polycentrism." You can find her biography and her Nobel Prize lecture here.

We Will See Clearly

Motivations matter. There was a story from an experimental economics lecture that illustrates this point well, 

Consider these three scenarios: 1) I trip and spill a hot cup of coffee on you, 2) I walk up to you and toss a hot cup of coffee on you, 3) Someone else hits me over the head with a 2x4 and I spill a hot cup of coffee on you. In all three situations a hot cup of coffee has been spilled on you ---but you feel differently and would judge me differently in each scenario. 

What really gets under our skin is the motivation. Yet, it is not easy to infer motivation from conduct and there are also biases we must fight against. For example, in psychology there is the well known Fundamental Attribution Error in which we blame the character (attribute) of someone rather than the circumstances (Here are some examples of attribution error). Most things are mixtures of circumstances and character. 


Today in church we read a passage that I have read many times before (1 Corinthians 13:12), but, never in this way, 

Now we see things imperfectly, like puzzling reflections in a mirror, but then we will see everything with perfect clarity. All that I know now is partial and incomplete, but then I will know everything completely, just as God now knows me completely.

I always perceived what would be made complete was my lack of informational knowledge.  Like explaining the presence of suffering in a world with a loving God. Or, asking about dinosaurs. But, our pastor pointed out that the last part, ". . . just as God now knows me completely," suggests something else. We see each other imperfectly. We do not know the hard battles each other are fighting. And, on top of that, we fear that if we were to give the benefit of the doubt they would take advantage -or- things would never get better. When we see things clearly we will see each other as God sees us.


We should be people that refuse to live in fear, but, instead pick the path of love. And, we should know that whatever sufferings we endure from love are not in vain. I want to close with a beautiful and poignant part of Rick Joyner's book The Final Quest:

I looked at the old eagle, and for the first time I noticed the scars amid his torn and broken feathers. However, the scars were not ugly, but were lined with gold that was somehow not metal, but rather flesh and feathers. Then I could see that it was this gold that gave off the glory that emanated from the eagle, making his presence so awesome.  

“Why did I not see this before?” I enquired. 

 “Until you have beheld and appreciated the depths of the treasures of salvation, you cannot see the glory that comes from suffering for the sake of the gospel. Once you have seen it, you are ready for the tests that will release the highest levels of spiritual authority into your life. These scars are the glory that we will carry forever. This is why even the wounds our Lord suffered are with Him in heaven. You can still see His wounds, and the wounds that all have his chosen ones have taken for His sake. These are the medals of honor in heaven. All who carry them love God and His truth more than their own lives. These are the ones who followed the Lamb wherever He went, being willing to suffer for the sake of truth, righteousness, and the salvation of men. True leaders of His people, who carry genuine spiritual authority, must have first proven their devotion this way.”