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The Voluntary City: Restoring Urban Life in Crisis Times
February 4, 2004
Peter Gordon, Fred E. Foldvary, Daniel B. Klein

Contents

David Theroux President, the Independent Institute

Good evening, ladies and gentlemen. My name is David Theroux and I’m the president of the Independent Institute. I want to welcome you this evening to our Independent Policy Forum. As many of you know, we hold these events every month or two here at our conference center in Oakland. The Independent Policy Forum is a series of lectures, debates and seminars on major social and economic issues, and tonight is certainly no exception.

The title for tonight’s program is “The Voluntary City: Restoring Urban Life in Crisis Times,” and we’re featuring a book that we’re proud to have published called The Voluntary City: Choice, Community, and Civil Society, which I hope everyone will read. We’re particularly delighted to have one of the editors and two of the authors speaking. We also very delighted have a third author in the audience, Spencer MacCallum.

For those of you who are new to the Independent Institute, hopefully you got a registration packet, which explains our program and includes information about upcoming events as well as many of our publications and media programs. Our website is Independent.org, and you’ll find thousands of studies and articles on many different issues there. You’re also welcome to subscribe to our weekly e-mail newsletter, which is called The Lighthouse, which you can do on the homepage, right at the top. The Lighthouse is edited by my colleague Carl Close, who is standing in the back. And I also hope that you might consider subscribing to our quarterly journal, which is called The Independent Review. It’s edited by Robert Higgs, and I think you’ll find that the writing and content are quite sparkling and of interest to anyone interested in public policy.

In your packet there is a copy of the program for tonight’s event, and you’ll see at the bottom on the first page that lists the program, information about our upcoming event, which will feature Richard Epstein from the University of Chicago Law School and the economist and historian Jeffrey Rogers Hummel from San Jose State University. And the topic is called “The Promised Land of the Free.” It’s based around a new book that Richard has done from the University of Chicago Press called Skepticism and Freedom.

Across the U.S. and in California and the Bay Area in particular, most cities and states are in financial crisis. Of course, that doesn’t include the federal government. It’s not just a question of the economy. It’s not a question of the war. It’s a question of many other things.

In California, of course, with the repeal of the state car tax increase, California Governor Arnold Schwarzenegger has declared a public safety crisis/emergency to address the fiscal crisis facing cities. But at least one of the questions to ask is, what is the optimal mode for providing city services? Must cities be centers for crime, for homelessness, for traffic gridlock, for pollution, for unemployment, and many other social ills? Should urban reformers rely on a political process that seems to put special interests above community needs?

Clearly, in most cities governments dominate a great deal of the decision-making that goes on. One of the questions that we have is, what is the outcome of that, and how does it affect the kind of problems that exist and the possibility of coming to real solutions?

This evening our speakers will provide a rich history of the dynamism of what might be private market and community approaches to providing superior social services, urban infrastructure and community governance.

Our first speaker is Peter Gordon, who is professor of economics and former dean of the School of Policy Planning and Development at the University of Southern California. He received his Ph.D. in regional science from the University of Pennsylvania. He has served as director of research at the Planning Institute. He’s been a fellow at the Lincoln Institute of Land Policy. He’s been a research scholar at the International Institute for Applied Systems Analysis. He’s also been a visiting lecturer at UCLA’s School of Architecture and Urban Planning. He’s a co-editor of The Voluntary City. I’m very pleased to introduce Professor Peter Gordon. (applause)

Peter Gordon Professor of Policy, Planning, and Development, University of Southern California

Thank you. There’s a handout here for those that haven’t got it. And this was going to be the overhead, but we have this instead of the overheads, and I have my pointer. [Laughter]

There are, first of all, some themes that are dominant in the book that my colleagues will probably elaborate. The school that I’m in at USC is called the School of Policy, Planning and Development, and the mantra of the school—and our reason for being—is that there are three sectors: the public, the private and the voluntary sectors. But one premise of this book is that there are really two sectors: there’s the voluntary sector and there’s the coercive sector.

We have really two impulses: we are self-regarding and other-regarding. We are not, as economic analysis would suggest, self-regarding only; we are a complicated blend of self-regarding and other-regarding. And it is useful to look at the institutions that people create to channel both of those impulses. It is well known that markets channel our self-regarding impulses into some pretty good things. And one theme that comes out here is that people have also developed institutions that channel our other-regarding impulses—and maybe that’s been overlooked.

So we are highlighting all kinds of arrangements: Before there was a welfare state, there were safety nets. Before there were cities, there were rules of property. Before there was municipal zoning, there were rules of property. Before there were public schools, there was education. Before there was modern government, there was infrastructure, and so forth. And the episodes that are discussed in the book, which some of my colleagues contributed to, document how and why that really happened. And that often happened spontaneously—people taking spontaneous action.

One of our colleagues was lamenting the fact that when he’s on an airplane, he talks to co-passengers and he reveals that he’s an economist, and then people immediately ask about the stock market—of which he knows nothing. So he decided that rather than admitting or confessing that he’s an economist, from now on he’s going to say he studies “spontaneous orders.” And that’s really what it’s all about here. We are examining a bunch of institutions that come to us bottom-up, and we compare these to the traditional impulse to look at top-down institutions only (or mainly).

Now, that dovetails into the discussion that we hear so much about: what the hell is civil society? We’re told that the first Wilson administration was interested in exporting democracy, and the second one was interested in exporting civil society. (And you’re supposed to laugh because I’m referring to the Bush administration.) [Laughter] Anyway, before we export it, what do we mean by civil society? I’ve listed six things in your handout that I think work for me, and this is point number two, if you want to go there.

Certainly, one element of phenomena that occur when people are left to their own devices—with a minimum of top-down rules—is specialization and trade, which contributes to economic growth—and that’s the one that Adam Smith and so many others wrote so much about. But there are other aspects.

People fashion practical institutions—auspiciously the common law. They form all kinds of communities. They form voluntary charitable mutual-aid associations and safety nets. They supply what some of us in the book call “market-challenging” goods. And in the book, we take issue with the idea of “market failure” and the mantra of neo-classical economics that the model fails in certain episodes, and therefore there is market failure and therefore the public sector has to do something.

Well, the analysis in the book says no, no, no; these are more likely to be market-challenging episodes. And it is surprising what it is that people do, left to their own, that resolves those episodes. And then, of course, they create social capital. So of those six dimensions of civil society, the first one is well attended to and the other five are less well attended to.

There is a book that I recently read that I quite enjoyed, which is Brink Lindsey’s book, Against the Dead Hand: The Uncertain Struggle for Global Capitalism, that some of you may have read it. And he talks about the twentieth-century fling in the world with socialism in Europe and progressivism in the United States as if that fling is over. And, of course, that fling is not yet over in the early twenty-first century in America. We have some very pricey compassionate conservatism, and if you look at the reforms of Social Security—and I think all of us agree that Social Security can stand some reforming—they are very paternalistic forced-savings plans, and it’s an open question to how much of a reform they are.

Now some of the authors in The Voluntary City will talk about some of the episodes here, but the episodes highlighted in the book have to do with the private provision of police services, the private provision of zoning, the private provision of highways, infrastructure and so on and so forth. And one theme that comes out is that we may have gone full circle. We may have gone through an episode where some spontaneous orders were in fact crowded out by the expanding welfare state, but which are now coming back in spite of the welfare state. And one of the most important mechanisms that’s going on here is people voting with their feet.

People voting with their feet is a dynamic phenomenon that we’ve known about since the exit-voice-loyalty discussion in economics. But in a more prosperous society, there is ever more likelihood of more people voting with their feet. And it’s interesting to look at those dynamics and to look at the kinds of responsiveness there is on the supply side when people take those actions.

There is considerable discussion in the book of what people did spontaneously to alleviate various market failures, and our colleague Alex Tabarrok calls that “refutation by existence,” meaning that there are textbook writers who worry about public goods and cite the lighthouse as an example of market failure. And you guys have quite a bit to say about the lighthouse; in fact, it is all over the place, right?

And those are people starting, I think, from Paul Samuelson on down, who may never have left their office and never realized that there was considerable experience of lighthouses being supplied on a contractual basis; and, likewise, there are the beekeepers for the apple orchards, and all that—economists that our colleague Alex called “theoretical empirics,” meaning that they get their data from the theory and then move forward. But the writers in this book, including some of our colleagues here, get their data not from the theory but from the data, and they, in fact, go in quite different directions.

There is some discussion in the book of what people do are able to do when they are living in a regime of flexible institutions that can accommodate an open-ended future; and they have done a lot of good things. And, again, some of that is re-emerging today—which is interesting because there’s this new term running around called “sustainability.” And there are all kinds of money available from various institutions and government agencies, if you’re going to say something intelligent about sustainability; but the premise is that a closed-end future is a good thing, that it’s plausible and useful. However, almost all of the episodes depicted in the book suggest that a closed-end future is not the way to go. And it’s good that there wasn’t the rage for sustainability 50 or 100 years ago, because where would we be?

In terms of the built environment, which many of us are interested in, there is some discussion of the demand for the rules of property. And the demand for the rules of property is quite clear. People like to plunk most of their assets in their residence and in their home. And if people are going to own such a risky and undiversified portfolio of assets, then they have a demand for rules of property that are going to make that a less risky proposition. And one way they manifest that demand is that they want zoning and such things.

Well, not only did covenants and land-use rules predate zoning, but they’re coming back into their own. As many of you know, since the 1970s there’s been an exponential growth in community associations, which have a lot to do with replacing conventional rules of property. In fact, if we disregard international immigration for a second, I think that within the U.S. there are three migrations that are going on, which are noteworthy.

People are moving from the frostbelt to the sunbelt. And many of us smug Californians look at the newspaper and the news every day, and we see the weather storms in the Northeast and the Midwest and we smile. The Pilgrims made a mistake and landed on the wrong coast back in 1620, and that random event is slowly being corrected over the last several hundred years, and that’s one of the migrations, the frostbelt to the sunbelt migration.

The other migration that’s auspicious is the migration from conventional, traditional city centers to the suburbs and into smaller communities. And the third migration is into private communities. We’re told that right now about 20 million housing units, or 50 million Americans, are in private communities. And of course many of us make all three moves simultaneously, right? We move to the sunbelt, into an edge city, and into a private community.

People voting with their feet in large numbers—and often choosing this aspect of privatization—are really upending much of the discussion of regional governance, which some of the elites talk about but which most Americans are not interested in.

There is an interesting debate going on right now whether or not private communities and small, local cities are complements or substitutes. The agreement is that they both come about because people want to protect a public good—the neighborhood quality—which has significant repercussions for their own wealth. And people will do things to make that happen. But to what extent are the two moves complementary, and to what extent are they substitutes? Those are interesting areas of research. Nevertheless, people voting with their feet are choosing rules of property that are much more endogenous than the top-down models would suggest.

When we look at the world this way, we see that there is significant mitigation of some of the market-failure concerns that have been so robust in the textbooks for so many years. Fred Foldvary will talk in a few minutes, and I think Fred is the inventor of the term “territorial goods,” is that correct? Okay. So Fred has helped us out by pointing out that most public goods have a spatial ambit, and because they have a spatial ambit, their benefits are capitalized in the value of land. And because their benefits are capitalized in the value of land, they’re transactable. And because they are transactable, things work out and they are not necessarily a textbook example of market failure.

Many of you have experience with commercial malls and industrial parks and trailer parks and all those things, and you know that entrepreneurs and developers make it their business to internalize the externalities, to arrange the uses, and to arrange the rents such that a proper and certainly non-chaotic arrangement of uses occurs. I teach in a real-estate development program at USC, and a lot of developers of commercial malls come in and explain to us why it is that they want to give a good deal to the Nordstrom coming in—because it maximizes the value of all of the other parcels that they’re lending out. So none of that is surprising; leave it to entrepreneurs to discover the solutions before economists ever do.

The Market for Market-based Governance

What are some other issues or questions that are presented by this discussion? First of all, some discussion in these chapters suggests that we’re now looking at a dynamic market for constitutional rules. Developers of private communities, trailer parks, industrial parks, shopping malls, and so on and so forth, are in the business—especially on the residential side—of presenting, coining, authoring rules of property which have to pass a market test. Very little is known about what kind of opportunities are available for both municipalities and developers, given that rules are now having to face this market test.

Another part of the discussion has to do with the approval process that developers have to go through. And we’re now told that there is more value added in getting through the approvals than in actually putting something on the land and improving the land. And you laugh, but I’m afraid it’s true. What that really means is that there is a transaction taking place: you get the approval if you kick in certain goodies that the zoning board and these other boards like. One of the authors in the book, Robert Nelson, suggests that the transaction be made explicit, and that it becomes explicit if in fact it is a neighborhood association dealing with applicants rather than the neighbors, the applicant and the zoning board, which is a three-party episode, with two parties doing the negotiating and the third being left out, and digging in their heels. We call that NIMBY—Not in My Backyard.

In the book, there is an interesting proposal, by Robert Nelson, about privatizing older and inner city neighborhoods, suggesting how that might be done, how state law has to be changed, and suggesting very strongly that not much of conventional policy has worked in favor of revitalizing inner-city neighborhoods and that perhaps if the denizens of inner cities had some ownership rights of the public spaces and facilities in their neighborhood, things would get better quickly.

There is an interesting suggestion about the hotel and other such examples. And Voluntary City contributor Spencer MacCallum says that these episodes we’re talking about are the way station because they still involve politics, and an all-transactions model is the way to go or is the way we think we’ll go, anyway. And he has quite a lot to say about the hotel as an all-contractual arrangement, which seems to work out pretty well.

Anyway, where’s all this going? There are all kinds of suggestions in these chapters, so my colleagues will elaborate on these. It is unclear the extent to which reform mayors and other leaders will take these up, especially in times of some of the crises that David Theroux alluded to. The rules of property and land-use planning come from many sources, including what some of the authors call entrepreneurial planning, and are we finally going to say that planning need not be an exclusively top-down activity—it can be a bottom-up activity, too. As I may have said in the beginning, this gets us back to a discussion of civil society, which now makes it into the newspapers even. And if we are going to export it, then perhaps we should better understand it.

I finally want to call your attention, though it’s not in the book, Lifesharers.com. As you know, people die all the time because there are no organs for them and there is rationing by waiting and dying. At the same time, there are laws at the federal and state level that say you cannot buy and sell human organs for transplants. People are dying, but there is the law.

What is so interesting about Lifesharers.com is that spontaneously and on his own, this man David Undis created a website where you can all go and sign up to donate your organs, should the circumstances arise. The point of doing so is that you are enrolled in a network whereby network members have first dibs on your organs; and if you need them, you have first dibs on other members’ organs. The network is growing, and it will save lives in spite of the law. And it is spontaneous, and it is created quite inauspiciously by one individual at a time.

So the question raised by some of these discussions is, how many other episodes like that are there going to be in the service of our welfare and our benefit? [Applause]

David Theroux President, the Independent Institute

Thank you, Peter. Our next speaker is Fred Foldvary. Fred is associate professor of economics and a member of the Civil Society Institute at Santa Clara University. He received his Ph.D. from George Mason University. He’s also senior editor of The Progress Report, an online journal. His books include The Soul of Liberty, Beyond Neo-classical Economics, Public Goods and Private Communities, and The Half-Life of Policy Formations with Dan Klein, who’s also going to speaking shortly. He’s a contributing author to The Voluntary City. Dr. Foldvary is also the recipient of the Antony Fisher International Memorial Award and the Community Associations Institute Research Foundation’s Award of Excellence. I’m delighted to introduce Fred Foldvary.

Fred Foldvary Professor of Economics, Santa Clara University

Good evening. The question we’re confronting today is why is the state of California and, in particular, why are our cities, in such a fiscal mess? And why has the gargantuan amount of government spending not solved our urban problems? Is it just incompetent and greedy politicians in an otherwise sound system of fiscal finance, or could it be that the very structure of California’s public finance is inherently dysfunctional? My argument here is that not just the system of taxing and spending, but also the whole structure of government in California and the rest of the country—indeed of the whole world—has inherent dysfunctions. Patching it up can help, but this can’t cure the problems. To do that, our political institutions have to be fundamentally restructured.

Ethics, Taxation and the Structure of Government

What’s wrong? There are three basic dimensions to the problem. First, ethics. Many people accept the current system because they themselves are petty tyrants. [Laughter] They think their values are better than those of others. They think their beliefs are more correct than those of others. They are supremacists who put their views above those of others—and, indeed, above that of liberty—and this creates social conflict and economic problems. So we’ll continue to have problems such as crime and poverty until society learns to recognize the ethical principle that it is morally wrong to impose restrictions and costs on peaceful and honest human action. So first of all, law and policy require a proper ethical foundation. If we legalize all acts without harmed victims, then security could focus on theft and violence, greatly reducing crime and the cost of law enforcement.

The second thing wrong with public policy is that public finance today violates the economic laws of prosperity. Taxes don’t just take money from people and transfer the funds to the government. Taxes on income or sales have to be added to the cost of production. By raising prices and squashing incentives, such taxes reduce the amount of production and investment, and that creates what economists call an excess burden. This is a colossal misallocation and waste of resources.

So how can government get revenue without an excess burden? First of all, we should reduce the need or desire for state revenue, eliminate counterproductive programs. Ending the war on drugs, for example, could save over a billion dollars a year in California.

Secondly, either privatize state programs or, where feasible, charge user fees. Parks, highways, even security, can be financed by fees from users. Schooling takes up a third of the California government spending. People pay tuition for private schools, why not also for government schools?

Third, collect restitution payments from people who cause damage. Polluters, for example, should compensate society for the harm they cause.

Fourth, if taxes there must be, they should at least be levied on items that do not shrink, hide or flee when taxed. The excess burden occurs because production shrinks when taxed, or it hides underground, or it flees to other places. So what is there that does not hide, shrink or flee when tapped for revenue? What do you think? The answer is right under our feet: it’s land, territory, space and location.

Land is here by nature. Can we import land? No. Can we manufacture more square miles of space? No. Space may be the final fiscal frontier. But tapping it is an ancient idea. It was described in the 1700s by the French free-trade economists who called themselves Physiocrats—they’re the ones who gave us the term laissez-faire. The three dimensional space within this room cannot be destroyed, cannot run away, cannot hide. The rent of space is the natural, efficient and equitable source of general revenue for public civic goods. Why is it equitable? Because of the phenomenon called capitalization.

Consider two neighborhoods. I’ll call them Muscletown and Skeletonville. Muscletown has beautiful parks, excellent security, no crime, well-paved streets, recreation, including big swimming pools, and fantastic fireworks on the Fourth of July. Skeletonville has no parks, poor security, high crime, streets with potholes, cracked pavements, no recreational facilities, and no fireworks. Now suppose your choice is which community to rent a house in; the rent is the same and everything else is equal. Where would you rather live? And how many would rather rent a house in Skeletonville? Nobody? How many in Muscletown?

Since most would rather live in Muscletown, the rent of real estate would not stay the same. The greater demand to live in Muscletown would raise the rent there, so the price of real estate, specifically the land value, would rise as well. So the better services of Muscletown get capitalized into higher rents and land values.

Now, there’s an unfortunate doctrine in economics called market failure, which Peter also referred to. For public goods, this doctrine says that markets fail because many folks want to be free riders. The market-failure doctrine says that once a public good like security or streets, which cannot be conveniently fenced, is made available, there’s no practical way to charge people. Therefore, says this doctrine, government must provide the service via taxation. Government must force everybody to pay.

What this false doctrine overlooks is that the public goods typically provided by government do not exist out in the ether, like some books would have you think, but rather in physical, three-dimensional space, like in Muscletown. To live and work in that space and location, people must pay rent, whether to a landlord or by buying land. So the most common users of public goods such as security and streets are not free riders, because they have to pay rent to be located where the goods are. If the goods are paid for by taxation on wages, then a worker-tenant gets double-billed: first, he has to pay taxes, and then, secondly, he has to pay the higher rent due to the goods. He gets double-billed. I say that’s not equitable. But when that rent generated by those civic goods is in turn used to pay for those goods, then there’s no double payment. That’s why the use of rent for public services is equitable in addition to being efficient.

Now you might be wondering, why—if rent is the efficient and equitable source of government revenue—why is government not using rent today and instead taxing sales, income and construction? I was counting the dimensions of how government today is so messed up. The first dimension is with ethics. The second is with economics. The third is our structure of government.

The way we elect governments today is with mass democracy. Thousands and millions of people are voting this year for candidates whom they don’t even know. These candidates need thousands and millions of dollars to send their message and their image out via the mass media, such as television. This demand is supplied to a large extent by special interests. The branch of economics that studies this is called public choice. The key concept is concentrated interest and spread-out costs.

Special interests, such as unions and big farmers, have an incentive to lobby for favors because they get a large gain per person. The cost of each subsidy is thinly spread among the taxpayers and consumers in general, so they have little incentive to know better about this and oppose it. Economists call the seeking of subsidies and favors “rent-seeking”—“economic rent” being any surplus gain, although a better term, I think, is “transfer-seeking.” Greedy transfer-seeking, which exploits public ignorance, is the reason why the law does not conform with liberty, why there are taxes that impose an excess burden, why out-of-control government spending has led to today’s fiscal crisis. So what are the effective remedies?

The most effective remedy is to transform government into networks of private communities. My chapter in The Voluntary City is on proprietary communities and community associations. A proprietary community is like a hotel or apartment house, having a single owner and providing housing and public services to tenants. A hotel, as we heard already, is a private community that operates in the market. The customers pay voluntarily, unlike taxation. The payment is efficient, unlike today’s taxes. When you use the hotel elevator, do you get nickel and dimed? No. The use of the vertical transit is gratis. So how is it paid for? From the room charge. The public services of the hotel, the escalators and elevators, the corridors, recreation, fire safety, security—all of these are paid from the room rental. There’s no added cost to use the facilities and therefore no excess burden.

Now, the Independent Institute has charged you one fee for admission. In effect, you are paying rent to be located here. But notice that the Independent Institute does not add a surcharge to the books it’s selling—at least I hope not. If they did, they would sell fewer books, and that would be inefficient. So the Independent Institute does not get revenue that way. Yet that is precisely how government imposes taxation. Condominiums and residential associations also use efficient public financing. The owner of a unit pays a monthly assessment, unrelated to his personal income, purchases or possessions. Again, there is no excess burden. In effect, the hotel guest or condominium unit owner is efficiently and equitably paying a site rental or land rent. Markets select for efficiency, unlike governments that impose needless costs.

So we could solve the fiscal problems of state and local governments by privatizing governance itself, shifting services to private communities paid for by user fees, rentals and fines.

Now, realistically this is not going to happen soon, but the ideal solution is very important for policy today, because it points to the direction of effective reform. It points to the direction that effective reform needs to take. We should move in the direction of legalizing, decentralizing, privatizing, downsizing and “physiocratizing.”

So to sum up, our city problems such as crime, pollution, poverty and congestion all occur because we’re not following the laws of ethics and economics that create liberty and prosperity. Sound public finance would not just bring revenue, it would also solve social problems. Untaxing labor raises wages and reduces poverty. Untaxing capital creates more and better jobs. Restitution for negatives like pollution reduces that problem. Private transit and tolls reduce congestion. So privatizing, or at least decentralizing, governance will reduce transfer-seeking and provide more effective services, such as better security.

A truly voluntary city would be made up of associations and networks of consensual communities. They would provide abundant public services because that would increase the rent, and so it would benefit the owners as well as the tenants, guests and customers. Private communities create market success. Thank you, I’m done. [Applause]

David Theroux President, the Independent Institute

One thing I might just throw out, which we can touch on during the Q and A period, gets back to something that Peter was alluding to—the California state deficit. During the transition period, incoming Governor Schwarzenegger had an audit done of the state, and as most of us know, when an audit is done it includes a balance sheet and an income statement. For some reason, a balance sheet was not included. There was no audit of actual state assets.

If you actually go to General Services and other aspects of the state government, you’ll find that there is no inclusion of major assets that the state of California owns and/or their valued acquisition level. In fact, you can’t even get a total report. If you want to go to General Services and get a report of total land that the state owns, you have to know what lands to ask for. So it’s an interesting situation: you have a fiscal crisis; and yet most organizations, when they have a fiscal crisis, one of the first things they think about is what kind of assets can they liquidate to get cash now. But that seems to be off the table.

Our next speaker is Daniel Klein, who is associate professor of economics and general director of the Civil Society Institute at Santa Clara University. He received his Ph.D. in economics from New York University. He’s been a visiting fellow in the Social Philosophy and Policy Center at Bowling Green State University. He’s been a visiting scholar with the City University of Stockholm, assistant professor of economics at the University of California at Irvine, and visiting scholar in economics at Stanford University. He’s also a contributing author to The Voluntary City. He’s also been a contributor to our journal, The Independent Review. He’s also co-editor of one of the Institute’s Websites, which is called FDAreview.org, which I would recommend to anyone who’s interested in health issues, especially pertaining to FDA policies. His books include Curb Rights, What Do Economists Contribute?, Reputation, A Plea to Economists Who Favor Liberty, and Three Libertarian Essays. Dan has contributed to many journals and I’m delighted to introduce him. [Applause] Dan is going to use the overhead projector and the microphone.

Daniel Klein Professor or Economics, Santa Clara University

Hi, everybody. I have a couple of slides, which I didn’t get to turn into a handout. They’re kind of just my lecture notes, which you can read on with. I just have five of them.

I wanted to thank David, first of all, for having us tonight and organizing these wonderful events, and for running a whole organization that makes these wonderful products. I think this one’s really an exceptionally outstanding one, and it’s not because I’m in it that I say that.

This project actually is quite old. David Beito, the first editor listed on The Voluntary City, was planning this collection probably at least 10 years ago, and talking about it, and beginning to put together a group of papers to put together, and he ran into all sorts of troubles. He also ran into some personal academic troubles. He’s fine now, and he’s landed on his feet, but sometimes academia does funny things to people.

But anyway, during those troubled years I think Peter took it over and really saved this project, so I’m really grateful to Peter as well as somebody who absolutely made the difference in this project coming together. Alex Tabarrok is the Independent Institute’s own, and he very actively involved himself in the editing and perfecting of this book, so thank you guys.

As David mentioned, my chapter’s about private roads, private toll roads that were common throughout nineteenth-century America. And before getting a little bit into that history and the themes there, I thought I’d say a little bit about Adam Smith because it relates to this theme of civil society that Peter emphasized.

Adam Smith, Esteem Mechanisms, and Civil Society

Smith is most famous for his 1776 book, The Wealth of Nations, where he beautifully developed the theory of the market and market mechanisms and how each person pursuing their own interests tends to actually promote the interest of society at large. People don’t know so much about his earlier book, The Theory of Moral Sentiments, and in that book he dealt entirely about these feelings of reciprocity, and esteem, and sympathy and how those mechanisms work in society. It’s got nothing to do with market mechanisms. He really began as an economist late in life. He was first a moral philosopher. In fact, his first job was as a rhetoric teacher.

And I thought I’d say a little bit about his first book because it has the same character and flavor of his more famous book, which is to say that he actually has a strong this view in this book, as well, of an “invisible hand” that helps make things work out well when they are voluntary. His term was “sympathy,” and what he meant by that was that our sentiments were coordinated to each other, and we were aware of our sentiments being coordinated, so in a sense, they were both of ours at the same time. And that was the cornerstone of his book.

Esteem is like love: it implies a sort of reflectivity, or it’s a kind of equilibrium in a coordination game we play. And when we get there we feel good about it; we’re relating to each other or we’re communing with each other, and esteemed souls look affectionately on each other. Hence, esteem is not merely fame, notoriety, attention or praise. In the extreme case of differential accomplishments, the hero at least esteems the admirer for appreciating that he, the hero, is worthy of esteem. At least you appreciate the larger cause that the hero is actually serving or being motivated by, and in that common appreciation, they esteem each other.

Smith saw that people value this kind of coordinated sentiment like they value food in their stomach. He posited at the outset that people are other-regarding, just like Peter said.

Sometimes economists get accused of thinking that people are selfish, but that’s generally not true, or at least it’s not good of the good economists. It’s a given that everybody—Californians, Oaklanders, Americans—are other-regarding. They do care about esteem. You do appreciate people, and you do appreciate being appreciated. He explained that people are motivated by esteem and that society works by esteem mechanisms as well as market mechanisms; and an important part of all this is what’s inside of us.

We study and idolize figures that we especially admire and esteem, who edify our deeper levels of esteem. And we imagine the would-be esteem from our friends and idols. I studied my master Peter Gordon when I was younger, and I like to think that Adam Smith would smile at what I do, as some people are happy that maybe Christ would smile at what they do. We developed the “impartial spectator”—that’s Smith’s term—on the cornerstone of imagined or phantom esteem. Thus esteem can be said to include self-esteem, that sort of internalized esteem, personal honor or conscience.

So this book really is very much about two kinds of mechanisms [TABLE 1], as its subtitle indicates. First, there are the market mechanisms (for which we have pretty darn good theories, I have to say). When people want X, that creates profit opportunities, in terms of dollars and cents, which then encourage the discovery of those profit opportunities by entrepreneurs who supply X and sell it to the people who want it, satisfying the demand for X. So the demand for X—toothpaste, for example—creates opportunities for profit. Entrepreneurs discover that opportunity—they supply toothpaste, they make profits by doing it. It’s a nice system; it works out well. That was the main topic of Smith’s 1776 book.

TABLE 1

The Provision of X:
Two Voluntary Processes

Market Mechanism:

Want of X -> Profit opportunities -> Discovery of opportunity -> Supply of X -> Satisfaction of wants

Esteem Mechanism:

Want of X -> Social awareness of problem of supplying X -> Esteem opportunities -> Discovery of opportunity -> Supply of X -> Satisfaction of wants

But there’re also the esteem mechanisms. The desire for X, in this case, creates social awareness of the problem of supplying X. Sometimes there’re difficulties and challenges to supplying X. Sometimes the market mechanisms won’t work so well, and those are special challenges. But awareness of that creates esteem opportunities. And then there’s discovery of these opportunities: leaders, heroes, good neighbor-citizens do what they can to supply X, reaping, as it were, esteem as their reward instead of profits and satisfying the initial demands for X.

So there are esteem mechanisms as well as market mechanisms. That’s really what Smith was talking about in the first book, and that’s what we see—just like Peter Gordon used the expression “proof by existence.” And we see a lot of voluntary action even when there’s not money in dollars and cents profit in it.

Private Toll Roads in 19th-Century America

So my chapter is about the thousands of private toll roads that were constructed in the nineteenth century. People paid for these by chipping in money. Now, these contributions to the toll road company took the form of stock purchases, which you might think was about hoping to get dividends from the toll revenues. But when you go back and read the social history, the promotions, the newspaper campaigns, and people’s diaries and the correspondence, you find out that most of these companies did not make any profits; and for the most part people knew this going into it.

Now if there’s not going to be dividends, why are you buying stock? The answer, at least for maybe half of these thousands of turnpikes, was that people saw it as community enterprise of providing a local service. And they did this for all sorts of reasons: it was in the interest of the community to have better highways; it would improve transportation; it would improve land values—which gets back to the territorial issues that Fred’s work focuses on. But still, even though it would be good for the community, it’s not as though one person’s contribution to the local highway project would probably have made a difference. So if someone really wanted to be unpleasant and a bad neighbor, they probably could not participate and still reap the benefits of the good road that their neighbors coughed up for. But by and large, that problem was overcome.

And they overcame it, as my chapter talks about, through a whole set of mechanisms deploying these esteem mechanisms or capitalizing on them: all sorts of private meetings, beginning at first with the people who would have the strongest interests in the project; and publicly announced meetings, including town meetings, famous New England town meetings—we’re talking about the 1830s—where they’d say: “We should have this road; it’s good for the country. Now who’s going to contribute? Put up your hand.” And they took public pledges so that people appreciated each other and also put social suasion on each other through correspondence—we’ve a lot of interesting correspondence; formation of associations and clubs; door to door solicitations; churches; and getting their leaders to say: “You should be doing your part in this. It’s not right of you to benefit from this community project and not do your share, not pull your weight.” And we saw, also, mixing of esteem and market mechanisms in all sorts of interesting ways.

So in terms of “proof by existence” that voluntary methods work—even when there’s not real profit in it—I’m going to show you some numbers. The percentage of 1830 GDP that went into these states’ private toll road projects adds up to 6.5 percent. If you compare that to the money that went in over 40 years to the Interstate Highway System—which is a big, famous highway period and movement in this country but governmentally financed through taxes and which is heralded as this great road construction event—that was less per capita in terms of 1995 GDP than what people contributed voluntarily for this period’s highway construction.

These highways existed and were built throughout the country. There were between 2500 and 3200 private toll roads that were actually built and operated in this country. And all together these were operating combined mileage of 30,000 to 52,000 miles. So again, it’s a big example of “proof by existence” that this can work.

In fact, the historians of nineteenth-century highway construction say that it was a private-enterprise success: it was not done much by government at all. The state departments of highways were only getting started by 1900; the federal involvement in highway construction was minimal. I could read to you quote after quote from California county historians back in old books saying that when the going got tough, people used private enterprise to build roads and build their infrastructure. They did not expect it from the local government or any other government they could hope to turn to.

So it can work. It’s not just about markets and profits. It’s also about community, and knowing each other, and esteem, and meaning, and the experience. And that’s an important point that often gets overlooked. Building a park is not really just about a convenient and lovely park for me to sit in—it’s also partly about how we got this park: “Am I part of where this came from or am I part of the process that provided this park?” That’s a big part of people’s well-being, as well—the meaning of the goods, not just the usage of the goods.

So providing these goods is also, I think, a very significant part of what we do and what we want to do with our lives. And I think that the process of doing it through voluntary means—of asking people to contribute, appealing to their generosity, showing real gratitude when they voluntarily make a sacrifice for you—is a lot more meaningful—it generates a lot more esteem—than the governmental approach, which is when the politicos decide that there should be renovations in the park or an extension of the highway, and then they start lobbying the legislature for money to extract it anonymously and coercively from taxpayers. I mean, we want the story of our lives to be a good story and not just to have a comfortable park to sit in. And I think that the voluntary story is a much better story to live than the governmental story. Thank you. (applause)

David Theroux President, the Independent Institute

Thank you, Dan. We’ve only touched on a small part of what The Voluntary City deals with in this huge topic, of course. So we have time for questions.

Audience Member

I found all your presentations rather interesting. I’m looking for a common thread that ran through them, and I’m reminded of something I ran into with my own students. And that’s the sense that economic transactions involve only the buying and selling of goods and services, and that profit-seeking is essentially a form of revenue enhancement. It seems to me that the whole notion of economic transactions and profit-seeking embraces a wide range of benefits that may involve giving your money away because you feel better afterwards for having done that.

Daniel Klein

Well, I completely agree with you. In economics it is unfortunate that there tends to be an emphasis on the money profit as the goal in business. And that’s not really true.

I think that our laws actually have in a sense bifurcated us, separated our sentiments and our goals, by actually creating the for-profit and not-for-profit distinction in private organizations. I think that’s an extremely unfortunate thing that has occurred. The law makes it hard for a for-profit business—let’s say a barbershop—to try to raise money with an esteem or charitable appeal. This may have some relevance if it’s a place where people hang out and are fond of it. Maybe they do some other interesting things with the kids there—draw and do their homework in the barbershop or who knows what. Those kinds of things could be happening, and those kinds of appeals would be easier if they weren’t put into the specific box of a for-profit corporation, because the not-for-profits have advantages in raising money relative to the for-profits because their contributors can write off the contributions. So actually, I think our law has heightened that unfortunate bifurcation.

David Theroux

Of course, economists talk about so-called pecuniary and non-pecuniary components of all transactions. There’s always a subjective value as a basis of transactions.

Audience Member

Dan, what you think of contingency contracts? Let’s say you want to build a road or a park or something, so somebody would spearhead this by going around and making contracts with people. The contract would say you’re obligated on the contingency that you get a certain percentage of other people who will commit themselves to this project. If, for example, 75 percent of the people in a given area will commit themselves to this, then you are obligated; if they don’t get 75 percent, then you’re not obligated. So this would be a way to have a voluntary contract without simply making it charitable. It appeals directly to people’s self interests.

Daniel Klein

Yes, that’s a very good mechanism. It alleviates the free-rider problem in particular. When you face a pure-free rider problem and you’re being asked to contribute to something, there’s a chance that it’s never going to work out, it’s never going to get off the ground. Maybe it’s been sunk in an effort to make it get off the ground, and you feel like a sucker. And this mechanism says we’re going to collect the money from you only if so many other people also sign as you do; we all assure each other that we’re not going to be suckers. It does help, sure.

Audience Member

Maybe you gentlemen know this and maybe you don't, but you’re talking about the two-tier form of healthcare delivery. It has a base so that nobody falls through the cracks, but then you get as much as you want if you’re willing to pay for it. This is the two-tier system all over Europe and the world, and it’s different from Canada, which is single-tier. Canada has a closed-end system, and they’re outraged up there, believe me—we’re up there a lot and we know. So, for what it’s worth, I hope you start talking about two-tier healthcare to combat this stuff about Canada. Do you see what I’m saying in here?

Fred Foldvary

Agreed.

Daniel Klein

We all agree.

Audience Member

For healthcare there are only three “single-payers” in the world—Cuba, Korea and Canada. Everywhere else is two-tier. Now, the problem is if we go single payer. Canadians come here for their healthcare—that’s how they get out of their system. Well, if we go single-payer, where are we going to go? We’re going to trap each other into a lousy system with no way out. And I think people ought to start thinking about that.

Audience Member

I’m president of the road association where I live. We have a private road and we’re also in a hundred-year flood plain. We were voluntary and it didn’t work: we had to resort to taxing everyone and having it go through the county with a state program that is set up for a road association to become a tax district. So even though my heart is with you when I hear you talk, I don’t see that voluntary contributions to things like roads will actually work in the real world.

Before we taxed people, we had about 75 to 80 percent compliance in paying road association fees. And when a flood comes in and wipes out all the roads, we have to have enough money to rebuild these roads, but it doesn’t happen voluntarily. It’s a very practical kind of use of taxes.

In real life, I don’t agree that there can be enough public contributions voluntary. I’m also a consultant in the non-profit sector, organizational development, so I know a lot about that as well. In real life, it just doesn’t work. You can’t build enough roads and have enough public good. I don’t know if any of you could address that.

Peter Gordon

Well, there are three options: There’s the taxation option, there’s the voluntary option that Dan talked about, and there’s the privatization option. And I think if we consider where would each of the three options be most useful, we’ve been auspiciously not doing that. And I think that we’re locked into a situation where we believe the taxation option is the only way to go, and I think that’s the problem right now.

I mean, if you talk about the crises in our lives—the crises in our lives are all the aspects where there is supply by the traditional public-sector means, whether it’s the schools, or the water, or the highways, or whatever; so that’s not working.

So I think one of the interesting things about the book here is that it shows what people have done or are doing that gets around those problems. Dan’s examples are historical episodes; there are also contemporary episodes where the privatization of roads is occurring. The private communities that Fred talks about have considerable road space that is privately owned and furnished. And I think we have more scope for that if we get around some of the issues that you’re worried about.

David Theroux

There are many different dimensions to these questions, but one other dimension is that in many of these instances, you have resources held in a common status; so you have the so-called tragedy of the commons, where people don’t have incentives to act, and so you deplete resources or you don’t act and you have this market failure. The usual response is that you need to further communize, essentially, with some sort of elite that determines the rules, and you impose the rules, which could include taxes.

The question that many economists are asking is: is that actually an optimal way to go, or is the problem because of the commons itself? The commons actually create a disincentive to act, and you’d be better off if you actually created stakes out of the resources so people had an incentive to ask and clear the market. Other questions?

Audience Member

To a certain extent all of you have talked about failure of government and related it to an ethical problem. It’s my belief that our ethical problem is enhanced greatly by an incredible lack of competence in government. To give you a brief idea, our local city manager just told us we don’t have a central tracking system to take care of our income. Our city revenues are simply not tracked. And I’ve served on several committees that have done postmortems on failed government, things like an election, total failure to raise taxes for infrastructure; and I’m beginning to wonder why do we pursue this failed government system, and I hear you talking exactly the same way. So what do we do to solve this problem?

Fred Foldvary

Well, I don’t think we’re talking in the same way. The governments can go on because they have the power under our constitutions and laws. They can tax people and be inefficient and continue, whereas in a private community they would have to get their money from people who voluntarily join the association, or voluntarily contract, or do business with them. Our cities and counties are kind of like a cartel where you can move from one community to another—I could move from Oakland to Berkeley or to San Francisco—but if they could allow us to form a completely new community not under the authority of any of these governments, then we could have real choice. But we don’t have that today. So, like Robert Nelson in the book, I also have suggested that the reform be that people can secede from cities and form contractual associations to replace a lot of what cities do. Then you’d have real competition and choice.

Peter Gordon

As you know, most people don’t vote. And so in all these primaries that we had last night, the reporting has been wrong, because the reporters should have said that winner number one is, “I don’t care,” and number two is John Kerry, and number three is something or other. And that’s the world we live in. Occasionally in a presidential election we get a voter turnout that’s near 50 percent. But it’s the “I don’t cares” that usually win. And I think that most of us do more due diligence of the refrigerator we’re going to buy than of the guy we’re going to vote for mayor or president or whatever.

And now, there’s a bit of a chicken and egg problem, which I think you’ve alluded to: which comes first, our level of disinterest and the performance, or vice versa? But to get back to Fred’s point, if we do give people governments that they feel are more responsive to them, be they small cities that have seceded from larger cities or be they community associations or both, are people more likely to take those seriously and be involved and do due diligence than in situations that you’re talking about?

David Lyon

I’m David Lyon from the Public Policy Institute. I’m usually standing in David’s shoes. I’ve just got to put this in perspective, and I’m going to pick on Peter a little bit. I lived in Southern California for 13 years, and I was a member of a condominium association during that period. The dream of the private solution is not as great—this young lady up here talked about trying to get money to build a road or maintain a road. After 13 years, I exited because the difficulties of running the condominium are just as difficult as running a local government.

In fact, it is more so because you have a tendency toward a regression toward the lowest common denominator of performance, which is, we’re going to spend as little money as possible to provide as few services as possible in the common area. And I finally got so frustrated, I became president of the condominium. I wanted to fix this myself and provide leadership, and I was exhausted at the end and said this is not working the way it’s supposed to. It is very frustrating—and I’m an optimist—so I don’t mean to leave you with the impression that the private solution is not the way to go, but it is not the nirvana that you’re painting.

It is a very complicated array of interests, and when they come together in an intense environment, as against a more dispersed environment like you’d find in a small town or a city, it all comes together in a very unpleasant way, and that’s why those of you who are lawyers know a lot about condominium law. It’s a major industry in California. It’s hugely profitable to be a lawyer in condominium law because there’s so much friction in that setting. I’m sure Peter has a response to that; I’m sure he has a wonderful condominium story.

Peter Gordon

I’m president of mine, David, for the same reasons that you were president of yours. But exiting the condominium association is simpler than exiting the state of California, and I think that’s an important issue.

David Theroux

That’s why condominiums compete.

Peter Gordon

Right, and we’ve got to hear Spencer on this, right? Come on, Spencer.

Spencer MacCallum

I’m just finishing up a paper that got started here in the Independent Institute when I was invited to take part in a Liberty Fund conference that led to this book, The Voluntary City.

Homeowners’ associations are not working. All my experience has been in social anthropology, looking at what is social organization. And I look at homeowners’ associations as a form of social pathology. [Laughter]

Now, there is an alternative that has never been tried. Our tradition in this country has been subdivision, fractionating land title, selling it off. And we have all sorts of governmental incentives, tax laws and so forth that foster this approach. But if it were made a level playing field for property developers not fractionate it, sell of the pieces and then go on to the next project, but instead to retain the land title as one single title and parcel it out for use in leaseholds, then you would retain any concentrated entrepreneurial interests in the success of the whole development that you had at the beginning that made it possible to do all that nice planning.

Then this would become a commercial property. It would become an income property instead of a group of consumers all trying to get together somehow to provide services to themselves. Now you would have an organization with resources behind it, devoted 100 percent of their time to maintaining the values of this little community or this neighborhood.

The improvements on the land could be individual or privately owned in all; but holding the land title together would make an enormous difference, because when a couple purchases a home, it may be the biggest investment they make in their lives, but now that property is a speculation—because it’s not an income-producing business; it’s a consumer item, a home. And the value now depends entirely on environmental factors, the neighborhood.

So now they’re nervous about their investment. They want to maintain their investment somehow if they can—have it keep its value. So what can they do? They can try to control some of the environmental factors that make up the value of that property. That means controlling who their neighbors are, and their neighbors’ lifestyle; and here you have them set up a homeowners’ association.

So there is an alternative to be looked at, and that is to make a level playing field for retaining the title intact and having a long-term investment income property here, instead of a subdivision. If this were done, then the couple who’ve invested in their home could relax a bit now because there’s someone on the job 24 hours a day maintaining the value of their investment, because if the neighborhood retains its value, so will their home. And now they can relax and enjoy their neighbors as human beings.

David Theroux

Okay, the gentleman right next to him.

Audience Member

As the presentation unfolded, I was sitting here wondering if I was the only skeptic in the audience, and I’m glad to find that I’m not. But as Dr. Gordon said, the winner was “I don’t care.” Doesn’t that defeat voluntarism?

Peter Gordon

No, I think the “I don’t care” posture is in response to the options that are on the ballot, and the options that are on the ballot strike most people as terribly unattractive. But I think what is so interesting about the episodes that we’ve talked about is that people voting with their feet, rather than voting when they stamp ballots, are the real story here; and there’s more voting with feet than voting with ballots.

Audience Member

I have a quick question, and this is to Peter Gordon in regards to your number two. What do people do when left with minimal top-down rules? And you noted that, A, “they specialize, exchange and create wealth,” and then the following steps B, through F, which have to do with forming various practical institutions, communities, organized charitable mutual aid. You said we kind of lack those institutions, and why is that? And I view these kinds of things as areas where, traditionally, women have taken the lead; and yet, today women have entered into A, where we are being forced into creating wealth and parity with men. How does that work in terms of your idea of voluntarism, which I normally see women taking the lead in?

Peter Gordon

Let me just clarify one thing, and then Dan will jump in and give the answer. [Laughter] No, I think what I was saying is that most of our attention has been to A, whereas B through F are also occurring and those are much less discussed. No, I for one have not thought deeply about or addressed the gender aspect, although there might be an interesting gender aspect there, which is what Dan wants to talk about, right?

Daniel Klein

No, actually. [Laughter] I mean, I wasn’t sure what you’re suggesting.

Audience Member

That voluntarism has declined substantially as women have been entering into the workforce. And I think that most women have historically taken a lot of the lead roles in B through F, but because of the need to be earners, to support the current level of urban lifestyle and whatnot, we’ve dropped off our B through F, and thus non-profits have stepped in to fill some of those roles, but they have changed the level of voluntarism in America.

Daniel Klein

There could be something in that, but I’m very much inclined to think that other factors are more significant in the decline of voluntary, charitable, non-profit type activity. In particular, the expansion and encroachment of the government on all the stuff that, as the book shows, used to not be government.

And secondly, let’s not forget market mechanisms. I mean, the automobile, the telephone, the computer make it a lot more viable for people to open businesses and get their insurance. There are chapters in the book about friendly societies, about mutual-aid societies where neighbors banded together to insure each other. Well, with market mechanisms, insurance markets were neatly developed, and so market mechanisms sometimes crowded out the non-profit, charitable-type provision of things, too.

Audience Member

When you buy into a community that has a covenant, you’re actually buying into it; and it’s very small compared to the rest of the country. I think the average private road was 16 miles long. What is the mechanism on a large scale? I mean, would the first road across America ever have gotten built if it had been left to privatization? Or even if there is a mechanism right now in computers, for instance, there’s a very difficult time. They’ve been trying to come up with a standard and they still can’t do it. So for large-scale projects, I’m curious what the mechanism is.

Daniel Klein

In another paper, a collaborator and I actually addressed just that question about road networks—the creation of road networks without a large governmental overseeing power. And we talk a little bit about the development of what was known as the Great Western Turnpike system, going from Albany along the natural course of where the Erie Canal came to be built. And what we find there is these people who were undertaking this piece and that piece, writing to each other, coordinating with each other, telling each other that “it’ll be valuable to us and to you if we both do this piece”—and they actually did coordinate the pieces to create a network, even though their own ownership and authority was over individual pieces.

So just because there’re interests in having the whole thing done, it doesn’t mean that it has to be some comprehensive authority that finances and creates the whole thing. Spontaneous networks can evolve across the country and so forth without that kind of central power.

Fred Foldvary

Also, the major highways between the private communities can often be toll roads, privately owned, and then they would charge tolls, and they would practice efficient pricing. They would have peak-load pricing, where during the most congested times they charge more, not just because there’s more revenue, but because it eliminates congestion, something that we don’t do today. So it would be quite profitable in many cases to have toll roads, paid for by the tolls between the cities.

But secondly, as Dan said, you could also have associations of associations. In other words, you could have, say, a group of 20 or 30 local communities create a higher-level association from the bottom up; and if a toll road was not feasible, they could then provide the greater infrastructure for that community. And those second-level associations could merge with other ones in forming the next higher-level associations. So you could have this bottom-up process of associations electing higher-level associations for those services that are more economical in a greater area.

Audience Member

Aren’t you creating another government, though?

Fred Foldvary

Yes, but the structure is different. It’s bottom-up instead of top-down, and each community below the higher tier is free to secede if it thinks it’s not being well served. So secession, and the bottom-up process of getting representation, would be quite different from today’s system.

So yes, there would be governance. See, in the market, it’s not government versus market that starkly. In the market there is a lot of governance. A big corporation has an administration. A hotel has an administration or a governance. So civic goods, public goods, include governance; except it’s by contract and through voluntary methods instead of this big, coercive system.

Peter Gordon

I want to add one thing. I use my ATM card in most of the big cities of the world, and I’m plugging into a network that was totally bottom-up and not top-down, and it seems to work.

David Theroux

Those who know about the history of the Industrial Revolution will recall that most of the roads that were constructed were produced privately, often without the king even knowing about it. And they discovered later that these roads were being constructed to bring goods to market, and to ports and so forth, and then tried to exact rents from that through taxes. We incidentally have a book that we’ve just finished the manuscript to, edited by Gabriel Roth, who used to be at the World Bank, on the whole issue of private and market-based roads. So a lot of these issues, hopefully, will be ones that we can feature at a future event. I’d like to also introduce another one of the book authors in the back, Mr. Robert Arne. I think he has a question.

Robert Arne (Contributing author, The Voluntary City)

Yes. My name is Robert Arne, and I’ve got a question for Daniel Klein. You posed the problem of public choice, and also mentioned that Adam Smith talks about esteem as a means of solving problems. And I’m wondering if the two can be applied to each other. If you have over-legislation on a regular basis, then is there some way that we can use esteem to turn things around?

For instance, I can say honestly that I’m a teacher on strike, in the sense that I will not work for the government. What I’m wondering is, in the same way as people sometimes refuse to purchase goods where the producer has nuked whales or something like that, is it possible that we could build esteem networks of people who will not take government subsidies—as a means of eventually lowering the amount of subsidies within the economy? I’ve usually dealt with the Constitution’s means of limiting government, but I’m wondering if esteem could be added to that.

Daniel Klein

I’d like to think so. I think this is a really profound and deep question, and it’s a question about our political culture and why it is what it is. If the four of us up here, as well as you, Robert, and you, Spencer, and a few of you others as well, think government is so terrible, and we think these esteem mechanisms are wonderful and so powerful, then why aren’t we fixing the problem of terrible government, right? Is that kind of what you’re asking?

Robert Arne

Yes, it’s the point that esteem can be used for the problems—

Daniel Klein

Yes and no. I think esteem mechanisms are complicated and imperfect. I do think they’re somewhat effective. I do think David’s been somewhat effective in doing what he does, which is dis-esteeming a lot of bad policy and esteeming a lot of the ideas and good policies and experiments that are going on—like homeowners’ associations, despite their shortcomings, Spencer. And so I do think we see esteem working to some extent, just as you are part of that esteem movement.

However, I do want you to keep in mind that it is not a free market in esteem. Just because it’s not working here doesn’t mean the free market in esteem has failed—because we don’t have a free market in esteem. We have K through 12 indoctrination in the other system, and all sorts of government, coercively funded esteem indoctrination the other way; 70 percent of college teachers work for the government, 88 percent of children go to government schools. The government controls the radios and the TV stations—they don’t control them directly, but they control their licenses. And so, you can’t just think that the culture reflects the natural or free market of esteem. It’s a very mixed economy of esteem in this country.

Audience Member

I believe the issue really is a quantity of freedom available in our country at this point, and I believe a graph properly developed would, by general agreement, indicate a downward trend or a diminishing trend. Robert Welch commented at one time that the greatest tragedy of the twentieth century was the growth of government at all levels.

I’m reminded of the example of Davy Crockett and his Congressional bill that he dealt with—the famous “Sockdolager” story, in which the widow of an 1812 admiral, in destitute condition, was being considered for about a $10,000 grant. And the issue before the House at that point was the awarding of, I believe, a $10,000 gift to her, drawn, of course, from the U.S. Treasury. He put all of the tremendous credibility that he had developed into a homely story that still makes the rounds. I’m sure some of you have read it. If you haven’t, I would point you towards it. He spoke against this, and he started passing a hat around the House chambers offering one week’s pay, on his part. There’s a volunteer effort.

I don’t know how far the effort went. I don’t know if it succeeded, but I’m certainly an advocate of voluntarism. But there must be freedom in order to have the capability to be a volunteer and to be charitable. Charity is part of the discussion here tonight, too.

Audience Member

In regards to Governor Schwarzenegger, do you guys feel that what he’s doing is right? Didn’t he declare an economic state of emergency, and with that power he was allowed to keep money locally in the governments, right? So that’s more in line with that you’re saying, Fred, right?

Fred Foldvary

Yes, keeping the money locally is a step in the right direction. However, he’s also proposing the $15 billion bond measure and all of these things that are opposed by Tom McClintock, the Republican that was also running for governor, as well as Richard Rider, who wrote an argument against it. So it’s not clear that he’s doing as much as he could.

The Reason Public Policy Institute, based in Los Angeles, has come up with a citizen’s budget, and they went item by item throughout the whole budget. It was a huge undertaking. They have identified about $18 billion worth of cuts, programs that could either be cut or at least suspended during this crisis. Now there have been some cuts, but I don’t see any great movement going towards these substantial cuts, and these are things that really wouldn’t make California worse off for the most part.

They evaluated things such as performance-based or eliminating duplication, consolidating things. Basically eliminating a lot of waste, or commissions like the Gambling Commission. Do we really need a state gambling commission? At least, can it be suspended for a couple of years to save some money, so the billions of dollars could be cut? Maybe, of course, the legislature would oppose a lot of this, but I don’t see him going in that direction as much as I’d like to see.

David Theroux

One thing I might add is that as far as the assets that the state of California owns, one thing that we did find out was that the state owns about a million acres in 15 of the wealthiest counties in the state, and these are primarily highly urbanized areas. And a few years ago one small parcel of about 142 acres, I think it was, in Santa Clara was sold to Sun Microsystems, and they built a new campus, and they bought it for about a million dollars per acre.

Now that was during the height of the dot-com boom, so if we were to conservatively assume that the price would be now one tenth—which, of course, is way below the actual price, but let’s assume it was one tenth—one tenth of that price times a million acres is $100 billion; and the deficit is $38 billion. And we’re talking about a rather trivial percentage of the total assets the state owns.

For example, the California State University system is not included as far as the assets that the state reports, as far as the buildings and land. And if the state were to sell these properties with a lease-back provision, it could raise an enormous amount of cash. Why is the California State University system in the housing business?

And the list just goes on and on, and yet many of these issues are not a part of the discussion, probably because of interest groups that have other things that they present, and it really is the little in the way of advocates that bring this information to the table, and much of it is simply unknown.

When we did make a proposal last year for this, there was a bill in the state senate that was a very modest proposal to sell some state assets. And some of the candidates have raised some of these matters in a rather very modest way, but the point here is that the scope is enormous. If CalTrans for example, which owns a lot of land, as well as all the state roads, and so forth, and other facilities, wanted to liquidate some of its parcels—and many of these parcels actually have been designated as surplus properties as long as 30 to 50 years ago—they have no incentive to do so because they don’t receive the revenues. The revenues go into general revenues.

So you essentially have a system that has little way to adjust to a fiscal crisis. There’s no incentive, there’s no reward. Individual citizens who don’t vote—why vote? Because you have no say in the outcome. Even if you vote and your person gets in, the person has no obligation to do what they say. So the individual citizen is disarmed from having input, which, of course, is a major argument for decentralization and essentially having a way to create stakeholders out of the citizenry.

We have just two last questions.

Audience Member

I’ve seen some of the scientific literature recently about anthropologists doing the study of economic behavior in different cultural venues. How does scientific evidence about differences in people’s economic behavior affect how we’re going to be looking at these problems in the future?

Fred Foldvary

There was a recent study, I think, that some chimpanzees had a feeling of justice that if others were given more than they, they resented it. Something like that. So there’s like an innate feeling of justice that primates have, and presumably we have that same origin. Is that related to that?

Peter Gordon

This is perhaps off point, but there was a lead article in the American Economic Review, maybe 10 years ago, of a survey of New Yorkers and Muscovites. The Muscovites had just emerged from 70 years of the USSR and the survey asked standard Econ 101 questions: What happens to the price of tulips when there’s a bad crop? What happens to the price of oranges when there are anticipations of good weather? And so on and so forth. And the point of the article, if I remember it correctly, was that the Muscovites and the New Yorkers answered essentially the same way. And now you can interpret that a bunch of ways, but I think the spin in the article was that the Muscovites answered the way they did in spite of what they had been through, and, of course, other colleagues said, well, why wasn’t there such a survey in Beijing? But I think those are interesting questions.

David Theroux

Right, and I think there are many different studies that have been done of these kinds of situations. For example, why would people, such as the Chinese living in Hong Kong versus Taiwan versus mainland China, behave differently and have different levels of wealth, and education, and many other things, when they have the same history, language, racial background and so on? Well, the difference was the institutions they were confronted with.

I think this gentleman right here has been waiting.

Audience Member

Thanks. This has been a most provocative evening, and thank you very much. It prompts so many questions, but I’m going to restrict myself to just one, perhaps a bifurcated question.

I was neither victim nor beneficiary of K through 12 acculturation in this society, so my awareness of American history is imperfect at best. But I wonder, is there a fundamental cultural obstacle that you face in achieving this voluntary society that you envision that’s rooted in the very important Calvinist and Puritan roots that underpin so much of American culture?

Fundamentally, the culture believes that people operate in their self-interest but that self-interest doesn’t always operate in the society’s best interests, so therefore the operation of self-interest had to be regulated by the society; it could not be allowed to run free and at will. And doesn’t the voluntary society, in order to work for the individual, require that the individual have the means in which to participate in that voluntary society and that therefore necessarily excludes, in some fashion, full participation or equitable participation by all members of a society regardless of the level of means?

Peter Gordon

Let me say something quick and then I’ll hand it to Fred. I think that we may have given a misimpression of the book, because it’s not simply that we’ve emerged from a golden age way back when. I think many of the episodes talk about things that people are doing today, and that’s why I sort of like the full-circle theme, and this is why we keep saying “voting with their feet” and other such mechanisms, and that people are people, and they are doing many things which have to do with substituting voluntary associations or market transactions for the top-down rule making. So it’s not simply that we’ve left something behind.

People are, in spite of what’s going on institutionally, doing things or resurrecting things that they’ve always done. Robert Putnam in his book Bowling Alone has been criticized for looking in all the wrong places and for saying that the historical associations are weaker than ever. And the critics say he’s overlooked the new institutions that have taken their place, and I think that’s an interesting place to look.

Fred Foldvary

Well, Adam Smith said the opposite, that people pursuing their self-interest lead to the social good—as long as you have a rule of law saying that you may not impose your will on others. As long everything is voluntary, then if a baker bakes bread—not to feed people but to make a living—in doing so, he serves society. So I don’t see this pursuit of our interests as not leading to the social good.

And secondly, as far as poor people not being able to participate, they are more so not able to do so because the state intervenes. For example, in education, richer people can send their child to a private school that is better, or more suitable to what they want. A poor person doesn’t have that choice. With an equal level between public and private schools, for example, if they had vouchers, then they could go to private or government schools, then it would a more empowerment of the poor.

Same thing with private communities. They’re not just for the rich. There are, for example, in St. Louis, private streets, private neighborhoods within the city. Not all of them are for the wealthy, because in St. Louis you can legally create your private street. Now, the wealthy are more able to do that. Why? Because when they pay taxes to the city and maintain their own street also, they don’t get a tax deduction for their own private neighborhood maintenance of the street. So it becomes more expensive. If they could have a tax rebate for the cost of maintaining their street, then it would be more affordable and you’d have a lot more private neighborhoods.

So the monopoly structures of the state prevent a lot the poor from empowering themselves.

END OF EVENT



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