Alex Tabarrok on Private Cities
Jan 26 2015

Alex Tabarrok of George Mason University talks to EconTalk host Russ Roberts about a recent paper Tabarrok co-authored with Shruti Rajagopalan on Gurgaon, a city in India that until recently had little or no municipal government. The two discuss the successes and failures of this private city, the tendency to romanticize the outcomes of market and government action, and the potential for private cities to meet growing demand for urban living in India and China.

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Explore audio transcript, further reading that will help you delve deeper into this week’s episode, and vigorous conversations in the form of our comments section below.


Jan 26 2015 at 12:24pm

It has come up a couple times.
Microsoft also has private buses that bring in employees from the (other) suburbs.

Cowboy Prof
Jan 26 2015 at 1:13pm


I really liked the postscript at the end of today’s episode to clarify something in the interview. I don’t want to add to your workload, but you might want to consider this as a regular feature offering points of clarification or pointing folks back to connections to other podcasts. As I auto-download, I don’t often come back here to visit the links.

I too was a bit “out of phase” when Tabarrok talked about Coase, but I just assumed I heard it wrong. (The dog was dealing with a cat at the moment.)

Although I think I need to listen to this interview again, I liked how Tabarrok noted both the upsides and downsides of the private city model, even when the downsides countered his priors. A very honest interview.

Michael Byrnes
Jan 26 2015 at 1:24pm

I agree – today’s postscript was very good.

I thought this key point about Coase actually fit in very well with Tabarrok’s research findings and his interpretation of them, and it was worth taking the time to emphasize that.

So, well done!

Jan 26 2015 at 3:38pm

The ownership of the lands of Gurgaon was not clear. During the description given I first imagined a large contiguous area of scrub vegetation. This picture quickly changed to a large area of scrub vegetation broken up into many pieces, some of which were privately owned and others which were publicly owned. Which picture is correct would certainly alter the outcome.

If the latter view is correct, then I’d guess that the public areas were under the control of some existing gov’t which held legal control of public lands and which originally held legal control of all the land in the area. In this case I would not call this a private city. What I’ve understood as described is simply one or a number of tracts – of homes, of office buildings, of mixed use, etc. But that is not a city.

For many years I have been a planning commissioner of a very large county which, for 25 years previous to 2008, had been planning and originating many large cities, cities of well-over 100,000 at origination. So I’m familiar with land use and zoning laws as well as large and small public utilities and their costs.

If my first imagined picture was correct he could certainly be describing a site for a private city IF the gov’t which had originally controlled the area formally quit it’s legal rights entirely. In this case, I know of many American builders, land developers and General Contractors very capable of building such a city, including all desired utilities. I’m sure other nations have many such capable people also. Nor would this city have to be especially larges; package sewer plants and other such utilities small in size are available and work well.

I thought Alex Tabbarok spoke as though he had never lived in a city that had grown up naturally, organically. It does happen when population pressure is positive but low. But it does not happen when the demand by population pressure if very large. Tabbarok also spoke of city growth as a venture that should return profits in a relatively short-term – 1 to 5 years. This is the time scale for tract developments, not for cities.

Financing and profits schedules differ greatly between tract and city development.

Jan 27 2015 at 12:08am

Gurgaon does not meet my definition of a gleaming modern city, and so I must respond.

First, I would have loved to see Russ ask for some evidence (statistics, facts) that Gurgaon is indeed better than the rest of India (maybe its there in the paper). You refer to these private developments as responses to government failure. Fair enough and I agree. A few people prefer to call them ‘gated communities’, which shut out the rest of society and live in a bubble. Do you see any issue with that situation, or would you say thats the market functioning efficiently? I can see the latter viewpoint but I can also see an argument against the fast rise of gated communities and the need to create public infrastructure (roads, parks, etc) that is accessible to all. This would carry us into a debate about inequality..

The city that you give as an example, Jamshedpur, was developed by one single corporation, the Tatas, as such they did not face any competition or transaction costs for cooperating with other corporate entities. It was not just that its was large enough to internalize the externalities, it was also the case that it was the sole company there and all benefits/costs went to it. Interestingly, there is a city, again neighboring Delhi, but in a different state, where you do have fantastic roads built by the state government and a sewage system that works well, gas pipelines, etc. Now that would be an interesting comparison! You may call is a ‘ghost city’ or a sort of ‘New York of the 1800s’. I couldn’t quite get the difference between the two. Both seemed to be examples of where the Govt was preparing/investing in anticipation of future need.

You mention that “public planning is usually not going to work, because the incentives aren’t there, the bureaucracy is inefficient, it’s corrupt, and so forth”. But the Delhi metro, built by a company owned half by the State Govt and half by the Central Govt, has been a blessing for Gurgaon and rest of Delhi. Without the Delhi metro going to downtown Gurgaon, one wonders if there would have been any incentive for the privately financed Gurgaon metro to come up.
I fear that by throwing up our hands in the face of corruption/govt failure, we allow the Govt. to walk away from its responsibilities. A case of, this organization simply does not have the ability, so why bother correcting its errors? A city requires both private and public participation to become a ‘modern city’.

Jan 27 2015 at 12:33am

Warren, I think you are focusing too much a narrow range of cities. This podcast is mostly about private cities in the developing world– not the developed word. Why is this an important distinction? Well, the twentieth first century is going to be the tale of rapid urbanization, especially in Asia and Africa. Various cities and urban expansions are going to be taking place. Unlike you and other planners and builders from the developed world, there are drastically less resources available for these developing societies; a decent rule of law, as well. So, what are the best way to optimize an urban environment in these rapidly growing, but still poor areas?

Jan 27 2015 at 7:51am

Especially given Russ’s consistently skeptical outlook on empirical methods, I was disappointed that there was little pushback in the interview about alternative explanations for Gurgaon’s success (even though I am personally sympathetic to Tabarrok’s explanation). Russ of all people should know that observational evidence that confirms your prior model can be misleading.

While I’m glad that Tabarrok was so open about discussing ways his expectations were subverted, one data point does not do a great job of proving his hypotheses which were confirmed, especially when we do not know how many regions faced similar initial conditions but failed to develop into successful private cities.

Finding a single successful private city, and explaining its path to success ex post appears to be strikingly poor methodology for truly learning lessons.

These findings should have been qualified as preliminary, and perhaps indicative of directions for further study, but certainly not as “lessons learned”.

Greg G
Jan 27 2015 at 8:00am

One quibble here. The explanation of the term “Potemkin City” more commonly rendered as “Potemkin Village” did not originate with the many failures of the Soviet communists.

It refers to allegations that Russian general Grigory Potemkin (1739-1791) constructed fake cities or facades of fake cities in order to impress Catherine the Great.

Jan 27 2015 at 5:13pm

Tabarrok speaks of homeowner’s associations or clubs substituting today in the U.S. as governments. This has been an interesting moral problem in the U.S., particularly when there is high population growth pressure. Suppose an existing older and smaller city surrounded by agricultural or vacant land. In this city the residents agreed, by voting, to sell a bond to raise money to build the necessary infrastructure and to pay for these bonds by a raise in taxes over a period of 30 years. They probably sold a lot of bonds over many years as they slowly grew for the whole range of utilities. And probably most of these bonds have been paid off by now.

Now suppose a developer comes to this city and proposes building a tract of homes on the outskirts of the city; big, upscale, new homes that will have a high property tax – some or all of which will go to the city. The land in question is already within the city limits (because the city had previously expanded its limits in hopes of capturing more taxes). The city now studies the costs of new schools, roads, sewers, street lights, state and federal highways, electrical supplies, water, flood control, police, fire, etc., and finds they are very high, huge in comparison to the present size of the city. What to do? Should the city sell more bonds to pay for these costs; Is it fair or just to the citizens of the existing city to ask them to pay all the costs of the new utilities. Can these costs also be shared with the future residents of the new tract(s).

For some years new extended development of cities was done this way. In time, however, as more and more, larger and larger tracts were demanded, it became obvious that asking the existing residents to pay for the costs of the new residents was simply not just, nor was it going to be approved by vote. Our state invented a new legal device named a Mello-Roos District. Other states had other names. In this legal fiction an area (of the new tract) is created as this District and is originally owned by the tract developer as the only voting member. Then when some percentage of ownership stated in the District is sold, a Homeowner’s association is created and voted into being (by the developer). This Homeowner’s association (Club) will forever more be responsible for paying to the (city or the developer) the costs of its development and its maintenance. Now the city government and their original citizens are happy, and the new residents are going to get stuck with paying additional profits to the developer(s) justified by the costs of setting all this up, and all the new costs they may wish to incur. They will also be included in any increased taxes the city creates, and are subject to all laws of the city, county, state, and Federal Gov’t. They will be repaid by being able to look down their noses at the ‘poor’ people in the old parts of the city. In this way, the two “cities” do grow together and are able to justly solve the problem of the huge transaction costs.

Our state also requires, as many do, that for every X number of new homes built and sold at market costs, one home is built and sold at a cost within a ‘low-income budget’, as defined by our State. However our state also requires all dwellings meet the “Uniform Building Code” written and approved by the agreements of those unions of the building trades. This is not possible to do, so the tract developers will build the ‘low-income’ houses at a loss and then add those lose costs to the new Homeowner’s Club. If our state permitted Habitat for Humanity to build these ‘low-cost’ homes to their low-income standard they would not need to be subsidized.

antho42 I had previously been quibbling about the meaning of the word “private”. Unless the nation / state completely gives up all claim to the land in question, I don’t consider it to be private. There are such proposed private ‘states’ or ‘cities’, I have heard. I think there is or was one, a Free State, in Nicaragua. I’d like to know how that worked out. Hong Kong sort of is or was. You mention that India has many fewer resources available, some of these lacking resources needed to create cities are money (income) of the residents, therefore jobs, and an honest population.
In the first half of the 20th century the U.S. had quite a number of ‘company towns’, in which a single company provided all the jobs and all the buildings and owned all the land. Does that qualify as ‘private’?

Jan 27 2015 at 6:35pm

Something that confused me. Tabarrok seems to imply that that the location of the land isn’t that important, just that local government doesn’t stymie the growth. In fact, if the government establishes the basic infrastructure, then the city is really poised for growth. That’s makes his “Detroit is moribund, so maybe people ought to just leave it for dead” comment so strange.

If you think about it, the infrastructure in Detroit has already been built. It has a sewage system in place. Running electricity grids, water, etc. The rest of the government has spent its way into impotence, so shouldn’t Detroit be the PERFECT place for a city to rise out of the ashes?

Jan 27 2015 at 10:34pm

I was quite puzzled by the use of Disney World as a relevant example in the context of the discussion. In fact it bothered me so much I got increasingly irritated at its mention. Disney World is not an emergent phenomenon. It was a top-down development by the Disney corporation. All the people who work there are employed by Disney or a subcontractor. Everyone else is a visitor who pays for a limited visit and only spends money. There are strict rules preventing entrepreneurial activity of any kind on the premises and no-one can enter unless they are an employee or paying guest. This is not an emergent order, this is a private dictatorship.

By contrast, a “natural” city like Saint Paul, Minnesota, is an entity that emerged from a tavern on a boat landing in the early 1800s. What started out as a corrupt free-for-all of tavern owners, madams, fur traders, boatmen and long-suffering missionaries has over the past 160+ years emerged into the thriving city of today. The vast majority of the residents of the city are there by choice inasmuch as anyone anywhere is. And we live with the compromises of over 5 generations before us and 250,000+ current residents. It’s not pretty, it’s not perfect, but it is about as emergent as you can get. Like just about every city in the history of the whole world, back in the day, there was no sewer system, no water service, no reliable anything. Muddy streets and some wooden sidewalks. What we’re seeing in places like India is the product of massive urbanization over a very short timeframe and political and social structures that have not yet organized themselves in a way to respond well to it. Eventually they will, and eventually civic trust will increase enough that corruption will become a mere nuisance. But emergent orders take a long time to develop. Humans are notoriously impatient.

Gurgaon, Sun City, Arizona, and gated communities elsewhere are top-down enterprises. There’s nothing particularly Hayekian about inner structure of these private planned developments. (Disney World doesn’t even count as a city–it’s the artifice of a city without any of the messiness that comes from people having to live and work in close proximity.) Like any organic entity, cities can become convoluted and peculiar over time (see the appendix, the human birth canal, or a giraffe drinking water), and eventually the structures that were adaptive to one time or place become ossified messes in another (see Detroit or the panda). The beauty of an emergent order is that it is robust despite having large segments that are byzantine and befuddling; the result of systemic compromises over generations if not millennia. GIven enough money and dictatorial control, any group of developers can come up with a perfect shiny city from scratch on vacant land. But this will never be the norm. Since such exclusive “clubs” are designed to keep the vast unwashed masses, most people will still end up living in their own organically emergent cities outside the “gates”. The history of natural cities is overwhelmingly messy and organic. Whatever control we think we have is fleeting and illusory.

What this episode was about was oddly a cherry-picked celebration of privatized governments built in exactly the way that libertarians oppose: a handful of individuals build a city from scratch from the top-down. I fail to see how this in any way can inform development issues in any scalable or reasonable manner. They are the linguistic equivalent of Esperanto. A nice idea that a very small “club” enjoys using, but meanwhile English, a language whose spelling rules alone are a marvelous example of emergent order, has become the lingua franca. That’s how the world works, and any discussion that tries to fight against the chaos instead of embracing it is a waste of time as far as I’m concerned.

Jan 27 2015 at 11:38pm

I may have totally missed some part of the discussion, but what do private cities do to enforce justice? Are private entities given authority to protect the peace and maintain/develop the law?

Mort Dubois
Jan 28 2015 at 10:13am

I agree with Chris – it’s a great comment. Speaking of emergent orders, have the Econtalk designers ever considered a system of up voting and down voting comments, ala Reddit?

[Yes, but first and foremost, voting on comments is not clearly consistent with one of our fundamental principles: that people should listen or read material in the original and form their own independent opinions, be it about the content of the podcast episodes or of individual comments. Secondarily, it’s not technically trivial given our existing system. It’s not off our plate altogether, but I’d say it’s not a top priority at the moment. We do know that it gives readers satisfaction and a sense of interacting; and that it is capable, at least at first, of rewarding commenters for submitting good comments. But anyway, the short answer is: yes, the idea has come up several times and may happen in the future.–Econlib Ed.

Arnold Ahyuen
Jan 29 2015 at 1:54pm

I am glad you challenged Alex on corruption. The multi-layered regulatory system in India that Alex mentioned made me think of Stephen Teles’s Kludgeocracy. Great podcast.

Billy Hankins
Jan 30 2015 at 2:11pm

Walt Disney originally designed EPCOT (Experimental Prototype Community of Tomorrow) to be a private city, complete with an industrial park, residential areas, and an airport. However, after his death the project was abandoned. Here is the Wikipedia article on the original plan and here is Disney himself discussing the plan in a video he produced.

Robert Swan
Feb 1 2015 at 6:41pm

Like Mort Dubois, I think Chris puts it very well, but I side with the Econlib Editor’s view on voting. Voting doesn’t cover the subtleties of agree with this part, but not this, so tends to happen more on the polarising comments. Have occasionally seen a hint of tribalism on the Internet.

I was thinking threading might be nice, but even that could be a mixed blessing. It would help passive readers to follow discussions, but might also promote bickering.

Adam S
Feb 2 2015 at 5:47am

This was a very good podcast, but I would have liked to have seen more conversation about China. That seems to be the elephant in the room – why was China able to grow at such a fast clip for 30 years while India has stagnated?

Alex and Russ alluded to the huge problem of Chinese “ghost cities”, but it’s also undeniable that China has grown much faster than India. Perhaps the Chinese model of “if you build it, they will come” is superior to the Gurgaon model?

I know neither Alex nor Russ (nor myself) think that’s the right answer, but it’s a legitimate question. Perhaps India would be in a lot better shape if the government just steamrolled over the old and built up the new. But it seemed like the China model just got shrugged off without a proper debunking.

Feb 2 2015 at 3:37pm

A better example than Disney World of a private city in the United States is The Woodlands, a suburb of Houston (see wikipedia).

Houston (and its absence of zoning) was mentioned in the podcast and has been mentioned in others. How about a separate podcast on Houston focusing on its development without zoning?

Feb 4 2015 at 10:47am

As a lay, non-economist, I found the podcast baffling. What was the point? I think Taborrak’s most significant comment was totally lost in the noise of over-analysis – its about the people :
“So, I would focus less on the cities and more on the people”

While there wasn’t much information on the quality of life and the day-to-day workings of the private city – it sounded horribly bleak and empty.

In the end I don’t believe the discussion shed any light on the viability of private cities. The definition of “externalities” was forced to conform to a much smaller subset of what the true externalizes are with respect to prosperity of humanity in general.

Feb 4 2015 at 6:52pm

An interesting discussion – though, I would have liked to hear a bit more about the details of how Gurgaon actually functions.

As others have commented, I found the Disney World references odd. It’s hard to ignore that Disney World is far from self-sustaining and is thoroughly dependent on external infrastructure.

But, I was particularly surprised that neither participant mentioned what a hellish dystopian nightmare it would be to actually live in Disney World. It’s hard to come up with a totalitarian nation in the history of the world that compares with Disney parks when it comes to enforcing restrictions on personal liberty. I’m the sort of person who doesn’t object to being called a socialist, but even I shudder to imagine living in a city with these rules. Given a choice between living in a city without working sanitation, and living in a city where “the usage of any flag, banner, or sign for commercial purposes or to incite a crown” is grounds for expulsion. . . I have a hard time believing either of the participants in this program would choose the later. The difference between corrupt bureaucracies and the Disney corporation is that Disney doesn’t even bother to hide the fact that it’s treating its constituents horribly.

Now, one might object that discussing Disney world as an example of privately-funded created space is entirely independent of discussing Disney world as a model for governance. But, is that fair? If Disney parks are an existence proof that private infrastructure can build neat things, is it any less legitimate to claim it’s a demonstration that top-down, unrestricted business interests tend to make incredibly ugly decisions? Would ten competing Disney Worlds make a difference? It’s hard to say – there are a lot of theme parks in the world, and I’ve yet to see one I’d want to live in for more than a day. (That Disney is more than happy to take advantage of a huge national government ready to bring legal action against any pretenders who come too close to infringing on Disney’s trademarks probably helps considerably.)

When casting about for organic, bottom-up, self-organizing structures worth celebrating, the modern city is pretty hard to beat. Even in failed nations, desperately poor places, and ungovernable regions, the largest cities tend to be pretty damned livable. In that sense, they’re unlike every theme park, Zona Dorado, shopping mall, and planned community I’ve seen. At least when my city does dumb things, I have some hope of changing them.

Paul Spring
Feb 10 2015 at 8:07pm

Yes. As a very progressive leaning person, I am still quite interested in understanding the beliefs on the other side. I commend Russ for presenting what I can only see as an example of how private enterprise as a substitute for democracy can fail miserably.

Ron Crossland
Feb 12 2015 at 8:52am

Thought provoking episode that I believe is a straw man for Coase’s views, not a good exemplar of how they could function on a city level. I did enjoy the comparison of how varying political systems and growth impacted city development (public or private). Comparing Gurgaon to China’s ghost cities to Detroit I found instructive, but not supportive of private city building.

The range of issues for a city are more complicated than roads and sewage. The fragility of Gurgaon as a primarily single resource city makes it a problematic city to go to, if one has competing choices. What happens in 20 years when IT changes again? Like Warren’s comments above, is Gurgaon truly private or is there some private/public interface that went unreported in this podcast? If so, then contrasting Gurgaon to Detroit might have more instruction, because you could compare the effects of a powerful industry (auto) which held some sway in a public setting against the life cycle of the industry.

Simply citing creative destruction’s inevitability doesn’t tally the toll it takes on those destroyed. Add to this creative destruction (of cities) to the technology changes of work and you have the cumulative effect of workers limited in their migration due to changing skills and means. Luggage is a paltry – perhaps even mean – metaphor for those left in the wake of rapidly changing vocational problems. It may have some surface resonance when applied to poverty stricken, subsistence farmers who were accidentally born in a place that insufficiently supports agriculture. But it loses its comparative explanatory power when applied to educated people working in a modern setting.

Job skills, even for those with advanced education and means (luggage), have limited fungibility. They are not often the most important factor in an array of “externalities.” Even the educated middle class can find it difficult to impossible to relocate when creative destruction affects their industry, vocation, or city.

Once any privately held organization exceeds 1,000 persons, it becomes increasing difficult to view corporate politics as being a less top down, power driven, special interests laden process than governmental politics. A podcast that compares the political structure of corporations to local government and the economic effects of those differences could be very instructive.

Ben M. Schorr
Feb 21 2015 at 6:55pm

I’d like to agree with the comments above regarding the use of Disney as an example, at least in some respects, of an idealized private city. The reality is that almost ANY city could exhibit many of the same traits Disney World does (cleanliness, etc.) if the residents were willing to pay for it.

You want an army of neatly groomed, uniformed folks, cheerfully wandering the streets picking up every piece of litter that falls? Easily done, but it’s going to cost a lot of money. Same with keeping a fresh coat of paint on every surface, changing every failed lightbulb immediately, etc.

It happens at Disney World because the Disney Corporation spends millions of dollars a day operating their theme parks (and they don’t have to operate schools, airports or other things real cities do).

The level of taxation that would be required from the populace to pay for that level of service would be staggering.

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Podcast Episode Highlights
0:33Intro. [Recording date: January 13, 2015.] Russ: I want to let listeners know there's a brief postscript at the end of this episode expanding on something that came up in the conversation. So, stay tuned at the end if you are interested. [...] Now, we're going to draw on a recent paper you've written with Shruti Rajagopalan called "Lessons from Gurgaon, India's private city". We're also going to talk about the rest of the world and what's going on in the history of private cities. Let's start with Gurgaon, which is spelled G-u-r-g-a-o-n, I think, for those of you who want to Google it. Tell us what's happened there--a rather remarkable turn of events in a very, very short period of time. Guest: Sure. So, the interesting thing about Gurgaon is that, as little as 1991, 30 years ago, it was nothing. It was just basically a wasteland. It was just outside Delhi. And there was really nothing there at all. And today, when you go to Gurgaon, it is on the surface a gleaming modern city. It has sky-scrapers; it has one of the largest malls in the world--the Mall of India. It's got apartment buildings, lovely with marble and all kinds of things like this. And it's a real IT (Information Technology) hub. Now, this city has grown. It's now over nearly 2 million people, grown from basically nothing to 2 million people. And it is has grown almost entirely in the absence of government. Government has basically failed when it is trying to do anything there; but the private sector has, to a large extent, filled in the gaps. And we'll talk about where it has failed to fill in--where the gaps have been too large. But this city has grown up with no urban government. There's really no city government. And it's really grown up in the absence of much state regulation or control as well. So it's a very interesting case of a voluntary city or a private city. Russ: And, as you say: it's gleaming, it's fancy-looking. On the surface it appears to be a remarkably successful city. Certainly that population suggests it's definitely doing something right. Of course, as you point out, there are many things that are not going so well there, and we'll talk about that. But what's fascinating to some extent about this growth is there's another city very nearby, also just outside of Delhi, that was sort of privileged to be the place everybody thought would grow. Tell us about what happened there. Guest: Right. That's Faridabad. And it was much more, beginning in this 30-year sort of growth period, it was already more developed. It had a rail link. It was--where there was an urban government. And indeed, this was the place where people thought that growth would happen. But the bureaucracy, especially with these local urban governments, on top of state governments, on top of national governments, was just overwhelming. And so very little has gone on there. It's a much less developed area. In contrast, the area which was ignored by government and which was just, really just not even useful farmland--it was more a wasteland than anything else--that area has been the area which has grown. Now, the growth: what's interesting is that--it's too much to say that Gurgaon is a Potemkin city--that's not correct. Russ: You should explain what that is. Because not all listeners will know what a Potemkin city is. Guest: Right. So a Potemkin city was sort of a, is a fake city that the Russian Communists sort of created to make it look like they were doing better than they were. Russ: It's a Hollywood--kind of like Hollywood storefront. It would look like there was a store there, but you'd go through the door and it was just a shell. Guest: Right. Exactly. Russ: For visitors to be impressed by. And then they'd tear it all down and go back to life. Guest: Now, this isn't that. But it does sort of remind me of a scene in the movie Titanic, when Leonardo DiCaprio, he's sort of dressed in his tuxedo, and he's in the ballroom, and you see all this wealth and this fabulous ship; and then he's being chased, and he runs; and he runs down into the engine room. And you see all these grimy, dirty people shoveling coal into the furnaces. And you realize that all of this stuff which looked modern is actually underneath, has this very primitive, 19th century feel. And Gurgaon is a little bit like that, in the sense that you have these gleaming skyscrapers, but there's no public sewage system. In fact, there's no central or unified sewage system. So, a lot of these skyscrapers, the sewage comes, and it's taken into trucks; and it is then dumped, sometimes illegally, on land elsewhere. The same thing is true of the electricity system. So, the electricity is again, the public part of the system, the electricity is on and off all of the time. It's never on for sort of 24 hours. In the summer, you know, you can't depend upon it at all. The water system--most of the water is on and off. You can't depend upon the public system. So, there's very little infrastructure. And one of the reasons we were looking at Gurgaon is to understand what's the limits of private entrepreneurship in developing a city like this.
7:13Russ: And, you have to be--one of the things I found so fascinating about this, is one, even though I know you are, as I am, sympathetic to voluntary action, you are not going to hide the warts. A lot of things are not so attractive. But it also reminded me of what's called the Nirvana Fallacy--the idea is: So, we just need public sewage, public water, and public electricity; which might be true. But if you are going to think about that seriously, you do have to look to look at other parts of India that have public water, public electricity, public sewage, public schools, other things that are done through the top down, through government, local or otherwise. And they don't work so well there, either. So you do have to make it--to make it a valuable comparison you have to take into account this thing called 'reality.' As opposed to what we like to think of as how it might work in our imaginations. So, both sides of this ideological debate, philosophical debate, have this problem. Right? Those of us who like private, say, well, the private sector will solve this. Well, dumping sewage in a field that you don't own is not exactly solving it. That's an unsustainable solution. So, react to that. Guest: So, let me go back and say: Why were we interested in this? Why did we write this paper? Well, the world as we all know is very quickly urbanizing. So, between 1950 and 1920[?] the world's urban population quadrupled. Russ: Between when? Guest: Between 1950 and 2000. I'm sorry. Russ: Yeah. Go ahead. Guest: And by 2050 it's going to double again. So, between just 2015 and 2030, in India, the urban population is expected to increase by over a quarter of a billion people. So, just think about that. What that means is that during the next 15 years, even taking into account the reduced infrastructure in India, India is going to need on the order of a new Chicago every single year for the next 15 years. At least. And then continuing on into the future. So we have, around the world, massive increases in the urban population. And most of this is happening in the developing world. And the developing world, of course, is struggling with corruption and with poor governments and with a lack of information. And you know, we just can't expect governments to work very well in these countries. So how are we going to plan? We can hope, right, that cities will be planned and laid out and the sewage lines will be planned for the future and everything will be divided neatly. You know, the way an urban planner in theory would do it. But that's just not realistic. So, what can we expect? Are there other ways of doing this? And Gurgaon is one possible alternative route, which involves, you know, leaving a whole lot to the private sector. Russ: When you talk about that increasing urbanization, say, in India, the most likely way that's going to happen is that the existing cities in India are going to get larger. And they are going to have increasing stress on their current infrastructure systems, which are not very effective, from what I understand, already. And so, the likely result of this urbanization and population growth is going to be muddling through with a big set of imperfections. It seems to me China is taking a different approach. China is saying: We need a bunch of new cities. So they are just building them. They are building cities out in the middle of relatively nowhere, from scratch. With lots of buildings, lots of infrastructure, from the top down. And I did read today--I didn't get to click through on the tweet, but somebody tweeted that the Chinese, some Chinese officials were bidding in auctions to keep land prices high in some of the cities that they are worried about. This is not likely to be a successful strategy for creating value. But China has taken a different approach. It might be a lot better. Guest: So, current urban areas are certainly going to grow. But there's also no question that we're going to need entirely new cities--both in India and China and elsewhere. And you just look at the United States. Even in the United States, which has long been majority-urbanized, we've seen growth, really essentially new cities. Like Houston, has grown in the past 50 years from 100,000 to, you know, several million people. And so forth. You think about the Industrial Revolution in Great Britain: the creation of new cities like Birmingham and so forth. It's not just London getting bigger, in other words. Although that happened as well. So, I want to put China aside for a minute, and maybe come back and talk about that. But I want to keep on, on Gurgaon, for a little bit longer, because I want to talk about what has worked, and what hasn't. Russ: Yeah, go ahead. Guest: So, fire prevention in Gurgaon works really well. So, what has happened is these private developers buy a chunk of land. And within that chunk of land you have excellent infrastructure; you have excellent delivery of services. So, the developers will build office parks. And within the office parks, you have sewage. But the sewage doesn't go anywhere. It just--once it leaves the office park--well, sometimes it will go to a small treatment plant. You'll also have electricity--electricity 24 hours, but funded with diesel, provided with diesel. Which is inefficient. You don't get all the economies of scale. You do get excellent fire protection. It's pretty interesting: Gurgaon has India's only private fire department. And it's the only fire department really in all of India which has equipment which can reach the top of these skyscrapers. Russ: Good idea. Guest: Yeah, exactly. The public system is a complete disaster. You also have delivery of transportation. So, these private firms hire taxis, sort of like Uber but a totally private system to bring their workers, ferry their workers, all over the city. Russ: Yeah. By the way, it's important to mention: we've had some discussions of private busses here, in Chile with Mike Munger. But of course many firms in Silicon Valley outside of San Francisco bus workers into their companies and have major, significant private bus companies. Guest: Exactly. It's very similar. Russ: They are running them themselves. I don't think they are hiring them out. But they are not public. Guest: Exactly. It's very similar to that.
14:55Guest: So, when we--looking at this question of what we expected, warts and all: when my co-author and I went to look at this city, what I expected was maybe what you might have expected as well. I thought, well, okay, what we'll see is the Coase Theorem working itself out. So, what we'll see is that these islands of planning of these private office parks and so forth, that they would slowly come together and that the private system would in fact solve these problems of economies of scale: that slowly you would get two office parks joining; they would build a sewage system; they would combine together even if they were from different companies. They would combine together to create eventually an efficient electricity system which could use economies of scale and so forth. And that we just did not find. That really was the surprise to me--the transactions costs were just too high. So that, you just weren't getting the economies of scale. So you have a lot of pollution because you have diesel instead of an efficient electricity plant. You don't get these firms together to build a unified sewage system. A lot of failures of that kind. Russ: So, let me challenge that just for a sec. I take your point. There could be other reasons besides the transactions costs that keep that from happening. Could be they think there is going to be a public infrastructure imposed at some point and they'd be wasting their money. I don't know. But let's just take the basic way that you described those imperfections. You said, it's inefficient. The scale is too small, so they're using diesel; they're polluting as a result. The sewage is probably an unsustainable solution or a fairly unattractive one. The electricity grid for the city as a whole is very imperfect; maybe within these industrial parks it works very well but it's more expensive than it otherwise would be if there were economies of scale. And of course--I want to come back to the Nirvana Fallacy: you say it's inefficient. But of course, doing it across the city with elected officials, patronage problems, corruption, especially in India, that's also very inefficient. And I don't think we want to just say: the city is failing in these areas because it doesn't do it as well as it could in America, say, where they have public governance and it works very well. Guest: Absolutely. So, compared to the rest of India, Gurgaon is actually pretty good. And this is often forgotten, the Nirvana Fallacy, as you say, when people look at Gurgaon, because there is this disconnect between--Gurgaon has sometimes been called the Singapore of India. And it's the Singapore of India in terms of private development, but it's like the rest of India in terms of public development. So, actually when you compare--you are right; when you compare Gurgaon, even on sewage, most Indian cities don't have a sewage system. So Gurgaon actually ranks reasonably high. The same thing is true of electricity. There's lots of shortages in Gurgaon, but you may remember just a few years ago, almost all of India had a blackout. You had like a quarter of a billion people without power for several weeks, because the entire Indian subcontinent in terms of electricity had a mass blackout, the worst blackout in the history of humanity. So, compared to the rest of India, Gurgaon actually does pretty well. What I was expecting was that the private sector would do even better. Russ: Okay. So, I understand. You had high expectations; they weren't quite met. But before we go any further, talk a little bit about schooling, because we recently had James Tooley on, and he talks about the incredible private school systems in the slums of India, for poor students, poor children and very poor families, and their relative success in these schools. The public school system in India is tragically not very good. A lot of teachers don't show up; when they show up, they don't teach. What's happening in Gurgaon that you know of? Guest: So, the amazing thing about India is actually we have the largest experiment in private education going on in the world today is in India. In lots of districts in India, you actually have a majority, sometimes 50, 60, 70% of the kids going to private schools. And this is because as Tooley points out, the poor send their kids to private schools. And often the rich do, as well. So the public schools, they are terrible for the poor. And they're also not that great for the rich, either. So you have a lot of entrepreneurship in private schools. And that's true in Gurgaon, it's true all over India, especially in the poor areas, especially in poor urban areas. Where private schools have yet to take off is in the rural villages, where there's just very little education at all.
20:22Russ: So let me paint a negative picture of Gurgaon that's different than the one that, the gaps that you are talking about. And tell me if I've got this right or wrong. When I think of a private city in the United States--and we're going to come back to the United States in a little bit--I think about Disney World, this rather extraordinarily efficient place, full of happy people and incredibly well run: any time you have a problem, they solve it. Just an incredible achievement. And all the externalities of urban life are internalized there, because there's an owner of the whole city. So there's no litter. If you throw anything on the ground, it's picked up; there's people all over the place picking up litter, so it's spotless. In fact, it's to the point where it's a little bit sterile, as a result. It's a little bit--you long for a little bit of grit and peeling paint sometimes when you are at Disney World; it seems too perfect. But one of the things about Disney World that those of us who like voluntary action have to concede is it's really expensive to go there. And it's for an elite--in America a lot of people can afford to go there. It's not only rich people who go to Disney World. But it's very expensive, and it's not easy for poor people to go--certainly to stay there in the Disney hotels and enjoy the full range of private stuff that's there. What's Gurgaon like? I was shocked to read that so many Fortune 500 companies have headquarters--not headquarters, have facilities there. You mentioned these industrial parks. One might think, then, that this is a city--it has all these successful features, some unsuccessful, as you've conceded. But is it just a city for rich people who can afford to enjoy the profitable amenities that have been privately provided there? Guest: So, I think there's two parts to your question. On the second part, Gurgaon has certainly attracted high-tech workers who tend to be among the better paid workers. The new India. This is where the new wealth is being created in the IT (Information Technology) sector; and Gurgaon is certainly an epicenter of that. In terms of the poor--look, it's not great to be poor anywhere in India, and Gurgaon is no better or no worse, I would say, than other places. Certainly not superior for the poor. But it's not worse, either. I think the key point which you made about Walt Disney World which is absolutely critical, is that he assembled a parcel of land which was large enough to internalize these externalities. And I think that is the way forward, in terms of a private model, is not quite the Gurgaon model, where you had these smaller parcels which internalized externalities--the office parks and the skyscrapers and so forth. What we need to do is extend the borders. So, there was lots of infrastructure development within the property line of these developments. We need to extend the property line. So, my ideal system, actually, would be something like 5 or 6 Walt Disney World-sized cities, all located within a competitive area. So, divide Gurgaon into 5 cities; make each of them large enough to internalize these externalities for sewage, for electricity, and so forth; and then make them competitive to keep prices low. And in fact, we found a city in India which was new to both of us which actually follows the Walt Disney World model to some extent. Much older. This is Jamshedpur. It's a very interesting city. This was started by Jamshedji Tata. Tata, you may know from the Tata Companies. This is now talking about the 1860s; the city was founded in the 1890s, 1900. He was the founder of the Tata group of companies, very entrepreneurial, very interesting guy. He traveled in the United States. He came to Pittsburgh and he learned all about the steel industry and he decided he wanted to start a steel firm in India. And so he hired British and American engineers and prospectors to come to India and to find the perfect place for this city. And they did; and it was in wilderness, complete wilderness where they had to deal with marauding tigers and elephants and so forth. And so to get the workers to come to this city, they had to create basically a company town. And they built Jamshedpur. And they laid out all the streets; they provided sewage; they provided, a little bit later, electricity. And Jamshedpur to this day is one of the best-run cities in India, because it has internalized, it's large enough to have internalized these externalities. So it's the only city, the Tata part, the lease-hold part, it's the only city in India where you have 100% of the waste water is treated. It has the highest reliability of electricity in just about all of India, perhaps excepting Mumbai. It's one of the best run cities. And it's because it has been large enough to internalize these externalities. And it's a city for workers. It's an industrial city. And it's worked out extremely well.
26:06Russ: I want to come back to this poverty issue, though. All that you said is right and interesting. But here's again, a question for someone who hasn't been there--which would be me. So, in the United States, in, say, 50, 60 years ago, before zoning got, to my mind out of control in most American cities, every city had a large range of housing opportunities. They had fancy houses and not-so-fancy houses. Medium sized houses and small houses. Houses in neighborhoods with lots of amenities and houses in neighborhoods with fewer. And housing prices were, a lot of choices for people. That's gotten I think less true; and I think that's a terrible thing. I think it's mainly through zoning that's made it very expensive to take care of folks. And the response in America has been--horrible policies, like rent control--to try to make housing available for poorer people. What I'm wondering about is in places like Gurgaon where the profit motive is what's driving things--so, it's successfully driving things in schooling: for poor people, there are private schools for poor people. I'm thinking about housing. So, when somebody builds an industrial park, say with apartment complexes part of it, I assume they are fancy. Are there housing options for poorer people? Are poor people essentially priced out of Gurgaon or can people with lower skills go and live there and be part of this, the thriving part of India? Guest: So there are housing options. The difficulty is that it's still--the system for getting hold of land and for getting permits and so forth to build. Even in Gurgaon which has a simpler system than the rest of India, it's still quite complicated and requires basically paying [?] bribes. It's still quite a corrupt system. Russ: This started in 2008--there was almost nothing in terms of regulation until 2008. Is that accurate? Guest: Well, that's not quite accurate. So, in most of India, you have all these overlapping multiple bureaucracies, and it's sort of what I call serial competition--serial in the sense of an electric circuit. You've got to go through each gate before you get to the final result, gate after gate after gate. So there are multiple hurdles that one has to cross. And what Haryana, which is the state in which Gurgaon, did is they simplified the system so that you only basically had to go through one Master Gate. But you still had to pay a toll to go through the Master Gate. But at least you only paid one toll. It was a more efficient system. So, it's still a system in which a farmer can't simply take a piece of land and sell it to somebody who wants to build a building there. Russ: Alex, that's true in the United States also. Guest: Yeah. Russ: You make it sound like it's this archaic weird thing there with these overlapping bureaucracies. We've got the same thing. We've got environment regulation, we have the zoning, we've got the-- Guest: The way I would put it-- Russ: The bribes are subtler in the United States. Guest: That's right. The Indian system, it's like Portland-level regulations on top of Indian bureaucracy and corruption. Russ: Right. Guest: So think about it that way. It's like they've adopted the level of regulation for a developed country and they are putting it in a less developed country and one where there's still a lot of corruption. So that's--if you can imagine Portland with 10 times the inefficiency, same rules but much more inefficient, that's kind of the system that they have. Russ: So, back to the housing. Guest: So, to get through that, you need a developer, a big developer to get through that. So, mostly it has been development of apartments and condominiums and so forth for the IT class--the new workers in India. There are a range; there's definitely a range of developments. But Gurgaon is not a paradise for poor workers. There's not a lot of high quality, low cost housing. Russ: I think, again, there's always a tradeoff. If you have a parcel of land and you want to develop it as profitably as possible, as you move--I assume as you would move farther from the city center, it might be profitable then for the highest use of that land to be lower-cost housing, lower quality, not as fancy, not as large housing and apartments. Because people aren't willing to pay as much when they are that far away from the center. So I can imagine there being--just as in America it's profitable to build--not every developer wants to build the fanciest apartments, because poor people aren't willing to pay. So you can make profit by developing it, but if you only have one piece of land and it's in the center of the city, it's probably going to be developed for a higher end. If you have other parts of land, and as you point out, if you could extend the borders then you'd think there would be more choices for people of lesser means. Guest: That's right. But it's also, if you have to pay the fixed cost of going through the bureaucracy, you are going to want something fairly significant to develop. So the poor end up creating basically slums on land which is unowned or on state land, common land. 'Slums' is not quite the right word, because some of the slums can be quite nice, right? People building on their own, if they expect to stay there; some of them can be quite well built. But there's not a lot of private development for that class at the moment. Russ: Are there roads there? And if so, who builds them? Guest: Yeah. So the road situation is terrible. It's a disaster. Again, within a development the roads are great. The main company there, DLF, has built roads between their office parks, between their two developments. So there's a little bit of that going on. But actually overall, the road situation, because it's on public land, is a disaster. It's terrible. Congestion is extremely high, the roads are poor quality, there are very few traffic lights. So, anything which is within the private areas is great; anything which is within the public areas is a disaster. And most of the roads are in the public areas, and it's terrible. Russ: And that of course is true in much of India that has an active centralized government as well; evidently their road systems are not very effective. Guest: Exactly. So this is true all over India. Gurgaon is not worse in that respect. But again, the disparity between the private and the public makes it look worse, because you can see the difference.
33:40Russ: Do you want to say anything else about Gurgaon? Can we move on to some of these private cities outside of India around the world? Guest: Sure. Russ: Talk about what is going on in the Congo. Guest: So, actually, I don't remember what's going on in the Congo. Russ: Well, it could be in some other countries as well. My understanding is there are Russian--I've been mining the archives of Marginal Revolution, your blog, before this episode. You did blog on it. There are evidently Russian entrepreneurs who are buying up large tracts of land to try to take advantage of large economies of scale in African countries, and building cities basically from scratch that would have infrastructure because they are large enough to do this, and they are centrally owned not by the people, not by the public, but by a developer. Guest: Right. So I think the model makes a great deal of sense. And it's also tied in a little bit with the possibility of charter cities, which you've talked about with Paul Romer. What we really need to do, since it is going to be necessary to have many more cities--Africa of course is urbanizing rapidly. And there's a lot of unused, essentially uninhabited land. So there is an opportunity to build large cities, to have a single developer have a large enough area to internalize all these externalities and to build a system from scratch which has laid out places for parks, has laid out sewage lines, has laid out water--where at least they are going to go. So that private developers know, I should put my pipes so that they'll end up here, which will eventually connect with the public system. Russ: This comes back to a line that some listeners asked me the source of. I don't know the source, but it's not mine. And it's moderately amusing but I think also very deep, which is: 'How do you cure poverty in Africa? And the answer is: Luggage.' You give people the opportunity, make it easier for them, give them an easier way to get out of where they are, which are not very productive places for people to live relative to the possible alternatives we could imagine. And what you are suggesting is that some people might just, as an entrepreneur, build a city and say, 'Hey, folks, come here.' I don't know if that is going to work very well. What are your thoughts on that? Guest: So, I think it can work well. Russ: By working well I mean, profitable for the developer and life-enhancing for the former subsistence farmer who now moves into a city. Guest: So, people who live in cities are much more productive than in the agriculture. We know in agriculture in Africa, in Asia, that it's essentially subsistence living. So, they are really just making enough to stay alive, to support themselves. While in the city, you can have people making much higher, much above subsistence level. So there's definitely room there for a large profit opportunity. And in fact that is what has created modern China--it's getting hundreds of millions of people out of subsistence agriculture and into the cities where they can make much more. The question is: Are we just going to pile them into the cities and hope for the best, or can we have a planning system? The public planning is usually not going to work, because the incentives aren't there, the bureaucracy is inefficient, it's corrupt, and so forth. Can we have a private planning system? That's at least what the hope is. It worked with Walt Disney World. It worked with Jamshedpur, in India. I think it can work in other cities as well. Russ: Well, the problem though--let's take the United States, add that to the mix. A lot of people left the South. They left agriculture and they flooded into New York and Chicago and Detroit and Pittsburgh and so on, Boston. And those cities were already there; they already had advantages--they were on water routes, or they were in scenic places or they were transportation hubs in other ways. There was a reason for those cities to be there in the first place. To go from scratch and say, well, here's a good spot, let's just try this: there's going to be a lot more failure, I think. Guest: It could be. But think about it, like, where I live in Fairfax. So, even 20 years ago it was mostly agricultural land--horse land and so forth. And now it's fully developed. So you could take a very big chunk of land outside of a current city or outside the bounds of a current city, and with urban growth the way it is going, that will soon become an urban area. But it can be a well-planned urban area if there's a single owner to begin with. There's something else, which is worthwhile saying here, is that when you have a single owner, the public goods--the sewage and the infrastructure and so forth--it can all be supported out of rent. Because the reason Walt Disney World spends so much to make its infrastructure so lovely is that people are willing to pay to go to Walt Disney World. Russ: Yeah. They capture the enjoyment and the benefits of those services in the form of higher ticket prices than there otherwise would be. Guest: Exactly. So it's captured in the land rent. So, there's a reason why these firms would develop this infrastructure, because then the other pieces of land can be sold for much higher prices. So, the profit motive can help us to build cities. We can think of it as 'hotel cities.' Hotels are great. You go in; everything looks lovely, it's beautiful, it's clean. You have some common areas, might be a fountain or something like that. Russ: Or the equivalent of a park. Yeah. Guest: Exactly. The equivalent of a park, just on a smaller scale. Russ: The bathrooms are nicer. The public bathrooms--they're private, the private bathrooms in a hotel that are in the public areas are nicer than the bathrooms in the park in the city. Guest: There's restaurants there. Russ: They clean them. Guest: There's entertainment. So what we need to do is to think about cities like hotels. How can we build a really large hotel? And after all, Walt Disney World, it has visitors. We just need to make them permanent, in other cities. It's exactly the same process. Russ: And they have residents. They have hotels there, within the park there, that they could be condos. Maybe they have condos there--I don't know. Guest: Yeah. Well, they certainly have places where people live. It's just that the people turn over. They are there for short periods of time. Russ: It's like AirBnB. Guest: Those people occupy the places on a permanent basis--just different people.
40:57Russ: So, let's talk about the economics [?] for a minute, because it sounds a little bit of maybe hand waving here that I want to challenge you on. Let's say I'm a very ambitious and entrepreneurial person. I'm actually a little bit entrepreneurial and a little bit ambitious. But let's jack me up about 20, 50, 100 times. So, I buy this massive area. And as you point out--I think, correcting my earlier challenge--you're probably not going to build in the middle of nowhere. They'll build them near cities. They can leverage some of the complementarity and synergy you get from existing urban areas. So, I'm able to put together a parcel--let's ignore issues of eminent domain, which are real--but let's say I've been able to put together this giant parcel. Which I now own. Am I going to rent all of the properties, some of the properties? Am I going to sell that land? If I'm going to sell it, what would be my incentives to maintain those amenities and infrastructure into the future? What's going to be the contractual relationship I'm going to have with either my renters or my buyers for going into the future, to maintain those incentives? How's that going to work? Guest: Right. Russ: How might it work? Guest: So, we do see this. We do see cities like this. Reston, Virginia, again not too far from where I am and where you are, I guess most of the time, was a private city--was developed exactly on this model. So on renting versus selling: so, a lot of the private firms--private firms will buy malls, will buy storefronts, things of that nature. That's always going to be rented. A restaurant that comes in will want to rent. The mall will tend to rent its areas, and so forth. So therefore the incentives there are on a continuing basis. Some of the houses, condominiums, apartments people will want to rent. Houses, people will want to buy. But then think about assessment. Taxes. Homeowners' association fees. These will provide a continuing reason why the firm will want to keep its infrastructure well developed. So, I live with a homeowners' association. Most of the new housing in the United States is in a homeowners' association, which is very similar to a private government. There are fees to keep up the infrastructure. And thus an incentive to keep the infrastructure well maintained. Russ: Those are a little different, right? So, my neighborhood--I've lived in some private-ish neighborhoods where we did our own, say, street repairs. And we had a little mini--you could call it a government, you could call it a voluntary association--you could call it different things depending on how you interpret the semantics. But we would elect a group of people from among us to be in charge of keeping an eye on the road repairs or the garbage pickup or whatever it is. And we'd be independent of the larger city government. And that works very well. You lose the economies of scale and you gain the accountability that you get from a semi-voluntary or cooperative arrangement like that. But part of what we're selling here when we talk about these large cities is the economies of scale of that single owner having the opportunity to internalize the benefits of centralization or economies of scale. And as I start to sell off my land, it would seem that I'm going to go back somewhat to where I am in Gurgaon. Or am I being too pessimistic here? In other words--let me say it a different way. If I had--a lot of this depends on how large one things the economies of scale need to be. If I have what you suggested earlier--10 Gurgaons--take Gurgaon; take the city outside D.C. that's private, divide it into 5 or 10; and competition among them is going to make it somewhat effective in making sure that the owner is responsive to the buyers, even when they've been sold, because there's other land maybe that hasn't been sold. Maybe the original owner gets a share of the selling price of the house. I could imagine--when it changes hands, maybe there are other ways to ensure the provision of amenities so that they are maintained. Guest: Yeah. So, it could evolve. But to the extent that economies of scale are important, and to the extent that we agree that a well-functioning sewage system is important, a well-functioning water system, electricity system, and so forth--what that means, another way of putting that is that the land is going to be much more valuable when it comes with these amenities. So, a developer, a profit-maximizing developer, is not going to want to split things up and let them all go their own way. Instead, given the opportunity to take advantage of these economies of scale, it's going to be much more profitable to keep all of these things together and to use the economies of scale. So, I mean--Gurgaon could be much more profitable than it is now; and I think it would have been had these more large-scale land divisions have been possible or been used. Russ: But another thing, it's an interesting challenge to think about going forward as you sell of parcels, how that's going to, how the excellence is going to be maintained. Guest: Yeah--we don't have a lot of experience, but from the experience we do have, with Walt Disney World, Jamshedpur, and so forth, I think these problems can be handled. Though I agree: these are challenges. Russ: I want to continue on that, but before I do--I don't want to forget: Do you want to say anything about China? Before we continue? And organization generally? Guest: Yeah. So, we do know--China has built these so-called 'ghost cities' which is clearly a negative impact of the top down approach. It seems that in many cases they are overinvesting. It's very hard to know, however, because things are happening so rapidly that you can make a mistake and you are only off by a year or two or three. The growth is happening so rapidly. And that may start to slow--we don't know. But when you are growing at 10% a year as China has for the last 30 years or so, well, that means that the entire economy doubles in 7 years. So, there may be a ghost city now, but is it going to be a ghost city when the economy doubles in just 7 years' time? It's very hard to say. So, I think-- Russ: I guess the other question is that if you keep building ghost cities, maybe you don't double every 7 years. Guest: Well, that's right. Russ: Can't keep that 10% going. Guest: The Solow model tells us that China has got to slow down. The reason China is growing so rapidly is that they are coming from such a low level. Once they get to a more reasonable level, as they are approaching, they will slow down, to correspond with their basic infrastructure and political system, which is certainly not the best.
48:48Russ: So, I want to talk about what we were getting near to talking about a minute ago, which is how government might emerge in these private cities. So, let's go back to Gurgaon. You've got these different developers--historically, that's what happened: they didn't have one single developer to take advantage of economies of scale. So, you have all these different developers. They all realize this Coasean bargain you talked about, that they could in theory make deals with each other to jointly provide, say, roads or jointly provide better electricity, jointly provide sewage. But they haven't. Perhaps because of transactions costs--it's just too hard to negotiate that and make it work well and figure out what the benefits are and make an investment negotiation like that. So, what we're left with is another possibility. There are two other possibilities: you muddle along with what you've got, which is mediocre compared to what you could have. The other is, you create a government; you take the--you don't necessarily let the current government expand. You create a voluntary association like we talked about. But effectively it would have some of the components of government. It might be voluntary in terms of payment, which would change things a lot, to have to get people to be willing to pay through maybe cultural methods or maybe there'd be a binding rule that eventually new development had to buy in to that structure, pay the fees. Is it possible for a quasi-government or a real government then, [?] a fully coercive one, to emerge such that it isn't corrupt, so that it isn't a patronage machine? So that it does focus on providing infrastructure, things that it does better than the private sector? It would seem that the people with a vested interest in that could in fact plan that emergence or steer that emergence a little bit so that it came out a little better than it would if it was imposed from the top down. Guest: I think it's going to be very difficult. It's usual to compare with New York, which really had the great fortune of a government in 1800 which actually was remarkably far-seeing. It's not that government is always terrible. This is one of the few cases perhaps where the government was far-seeing. And what they did in 1800, 1805, was they laid out Manhattan. They laid out New York with all the roads, where they were going to go, all of the public areas, the parks and so forth, long before people were actually living there. Now, that's important because what has happened in Gurgaon is, once you have the developments in place, then you've got these rents and people dispute over the rents. So, in New York, you kind of had a veil of ignorance. Right? And you had a constitutional moment where people didn't know what the rest of New York was going to look like; they didn't know who was going to own, they didn't know which pieces of land were going to be especially valuable. So they were just able to lay out the roads and lay out the grid and no one complained too much because it wasn't obvious how you would make money out of that. Russ: There were no vested interests there yet. Guest: Exactly. No vested interests. There's no people living there. They were laying out in 1800 things which wouldn't happen for another hundred, 150 years. So a constitutional kind of moment. In Gurgaon, now that the development is in place, one developer wants the sewage line to go this way, the other wants it to go that way. And then the government, they want a share of the rents as well, so they are in the middle and they have the permits and the rights over these things and so forth. So you have a dispute. And that's where I think the transactions costs really come from, is everyone now knows: Well, there's a lot of money here and a single decision about where something is placed, people are going to have to give up some of their land, so who has to give up the land for the road? Who gets the land which is beside the road, which is very valuable? Who gets the land beside the subway, which is going to be extremely valuable because that's where people are going to be able to shop and that's where they are going to want to live--who gets that piece of land? It's extremely, extremely difficult. So I think things will get better over time. We do see a few examples of that. There was a metro system that's just been built, the only privately-built metro system in India. Russ: You mean a subway? By metro system? Guest: Yeah. I don't know if it's all underground; I don't think it's literally underground. But it's a metro, public metro system. Russ: Trains. Guest: Train. Yeah. But for commuters. And that was privately built. It's about 13 kilometers long, and it goes from--as you might expect--the major developer, it goes from one part of the major developer's controlled--the next stop is at the next industrial park and so forth. They had a reason for doing that. Russ: Well, yeah. And the Disney monorail stops at the places that [?] likes. People want to go to. Guest: Yeah. So, slowly you get some things like that. But the rents are now so large that these transactions costs are so high that I'm not optimistic.
54:36Russ: What about--you've done a lot of studies of American history and urbanization, talked about New York, and of course the flip side of that New York story is that Robert Moses was planning like crazy a little bit later than 1800 and some of his plans were extraordinarily great and some were absolutely awful. So, once you consolidate the power to plan centrally you do get some great and some awful things. What are the lessons of all of this for non-private cities? So, you live in Fairfax. I live in the great Montgomery County in Maryland most of the year. We have great cities in America but many of them are doing very, very badly, the core central cities. They, too, suffer from these infrastructure problems even though they are not private: they have bad schools, they have bad police, they have bad roads, potholes, fire service not good, etc. What can we learn from this? If anything. In a way maybe Gurgaon is just a one-off miracle, a wonderful little experiment of how well a private city could work, with warts but it works pretty well. Does that have anything for us to learn in a world where Disney World is just an amusement park--because right now it's not a place where people can live and work in any great number? Guest: So, we're not building too many new cities in the United States. Though our cities are continuing to grow. And it is interesting that the way they're continuing to grow is almost entirely through private efforts. So, most new housing will be built today in the United States with a private government. Something like a homeowners' association. Which really takes over from the municipality. These homeowners' associations, 60, 70 million people now live in them. They collect hundreds of billions of dollars' worth of fees. They now control everything--security services, snow shoveling, road maintenance. They do kind of zoning--which some people get upset about. But these homeowners' associations, which are really private governments, that is how most of new housing in the United States is being developed. Russ: Yeah. I call them clubs, I think might be a better-- Guest: Clubs. Exactly. From Jim Buchanan's work on clubs. That's exactly what they are, is clubs. And so that failure of the public sector which you're talking about in some of the inner cities and elsewhere as well--the failure of security, the failure of police and fire and so forth--people are seceding. They are saying, 'We're not going to live here any more, and we're going to instead choose to live in these more private communities, or privately run communities.' Russ: How about for the rest of the folks, the 260 million who aren't living in those private communities? A huge part of America of course is living in suburbs. And so-called edge cities. Where the failure of the central city governance has pushed people out--they are still public, there's still county government in those places and things are still publicly run off, garbage, streets, etc. But what about the folks in the classic American cities of Chicago, New York, Detroit, Philadelphia, Boston, and so on, who are very much living in centralized, top down, publicly run, politically run areas? Is there anything we can learn from Gurgaon that's useful for them? Guest: I think where government is useful is laying out the structure. Laying out where parks are going to be and where lines, electricity lines are going to run and things like that. And then getting out of the way. If we think about, what are the best cities in the United States, particularly for the poor, it's places like Houston, which have no zoning and which have very easy regulatory systems in which you can build. You can get a permit to build within a matter of days, compared to New York where you've got to go through a dozen different permitting processes and you have to hire specialized people whose only job is really to stand in line and to help you get through the process of getting a permit to build. Houston, in contrast, much easier. And housing prices because of that are low. So, people of modest means can still buy a house in Houston. And they can't do that in many other places in the United States because of zoning and not-in-my-backyard, a kind of succession[?] of the rich, not in terms of these gated communities but in terms of adding on rules and restrictions in how large your lot has to be in order to build a house, how many people can live in the house. All of these things have made it extremely expensive to buy in any of these cities, which use more top down planning. Russ: And what do you think are the biggest things that might happen that would make currently not-so-viable cities more viable? Detroit's an obvious example. We should have talked about Detroit earlier. It's a regular public city but the public part of it's kind of broken down, because they don't have any money. And as a result, there's a lot of private stuff going on in Detroit. And end around--I think of it just like these private schools systems in very poor countries: when the public system is totally ineffectual, there's a lot of private provision of services in Detroit is my understanding. Again, is that maybe a way forward that might change some of these cities that are floundering? Guest: So, it's interesting. The biggest success in Detroit has largely followed this model: it's that the founder of Quicken decided that he was going to go to Detroit and reestablish the central city, and bought a whole bunch of buildings in Detroit and because there's been a single owner, has managed to establish at least a bulwark or at least a landing ground that might be-- Russ: A toehold, that might be a foothold. Guest: Exactly. Yes. Thank you. But I'm not that especially optimistic about Detroit. Look, another thing we have to remember is that creative destruction--it's not just about firms. It's also about cities. Sometimes cities are no longer in the right place. And they no longer have the industrial base which is necessary--you don't want to have a city there. So, I would focus less on the cities and more on the people. Maybe the best thing for people in Detroit is to leave Detroit. Russ: Luggage, baby. Guest: Exactly. It's remarkable when we think about the mass immigration from the South, away from Jim Crow laws-- Russ: And away from cotton. Guest: Exactly. Into the North. Millions of people moved toward the better life. In many ways that was incredibly successful. Not that they left all of their problems. Plenty of problems. But that was incredibly successful. And now we're seeing similar movements of people often into the South, into the Sun Belt. And we're seeing immigration. We're seeing lots of people from Mexico coming up and from other Latin American countries coming up into the United States. So they are founding new cities, new ways of life, new schools and new developments and so forth. So, I'm less--I don't have this view that every city must stay the same as it's always been and never decline. Part of creative destruction is destruction. So we are going to see cities decline. And if we really want to help the people in those cities, we should help the people, not the cities.
1:03:39Russ: This is a brief postscript to the interview with Alex Tabarrok dealing with his mention of the Coase Theorem and the insights of Ronald Coase, which come up fairly regularly here on EconTalk. Early on in today's conversation Alex said the following--and I've cut it a bit, but it captures what he said: "When my coauthor and I went to look at this city, what I expected was maybe what you might have expected as well, what we'll see as the Coase Theorem working itself out, these islands of planning and these private office parks, that they'd slowly come together and that the private system would solve these problems of economies of scale and that slowly you'd get two office parks joining to build a sewage system; they'd combine together even if they were from different companies, to create, eventually an efficient electricity system. And that we just didn't find. That was a surprise to me: the transactions costs were just too high." I think Alex got the economics exactly right; and later on in the conversation he went into more detail about the nature of the transactions costs. And I thought that was very, very interesting. The only thing I want to quibble with is a semantic issue. It's one that's come up here a lot in the past, and I wish I'd mentioned it when Alex was talking. Alex said he was surprised not to see the Coase Theorem in action--people finding ways to allocate resources to their highest use and taking advantage of economies of scale. My response would be that he did see the Coase Theorem in action. We just have a different way of describing the Coase Theorem. Because, to the extent there is something called the Coase Theorem--that is, a profound result from Coase's 1960 paper, "The Theory of Social Cost," it's the point that in the presence of transactions costs, resources don't necessarily flow to their highest use. Coase made two key points in that 1960 paper. The first insight is that in the absence of transactions costs, the assignment of property rights isn't important because resources will flow to their highest use regardless of who owns the rights to a particular asset. That is, regardless of who has the property rights. If another party places a higher value on the asset or property right, they'll negotiate a purchase from the rights holder. This seems obviously now, but it wasn't when Coase presented it in 1960. And it's a very important insight. It makes you realize that often the allocation of property rights or an asset determines who benefits from it, not whether the resources are used for its most valuable application. But the second insight of that 1960 paper of Coase is maybe even more important. And that is: in the presence of significant transactions costs, which can often be the real world case, the assignment of property rights matters very much. When transactions costs are high, it's expensive to reallocate or negotiate. And that can mean valuable resources get underutilized, and there's no guarantee that things will work out well. Now, I've talked about these two parts of Coase's article in a number of EconTalk episodes, including the episode with Coase himself shortly before he passed away. And of course I've also talked at length with guests such as Don Boudreaux and Robert Frank about the further implications that come from Coase's way of thinking about property rights, particularly when there are externalities involved. So, coming back to what Alex said: He was using the term "Coase Theorem" the way it's often used: that resources will get allocated to their highest use through negotiation, even if things don't look so good to start with. My point is that I don't think that captured what Coase emphasized or Coase himself saw as his most important contribution. And that was the role of transactions costs in determining where resources ended up. And barriers to negotiation. And of course Alex understands that; I've chatted with him after this episode was recorded and told him I was going to add this postscript. This is just in many ways a semantic issue. But it's a semantic issue, as long-time listeners know, that I care about very much. And I think it's important to make it clear what I think Coase at least thought was his most important contribution. Talk to you next week.

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