Planning and the invisible hand: Allies or adversaries?

Introduction

Everybody plans. Individuals plan what they will have for dinner; businesses make plans for new products, for capital investment, and for financing their activities. Meanwhile, in market activity (and in other areas of life), people’s plans are coordinated by an invisible hand, within a structure of market and broader social institutions. The planning is “bottom-up,” in the sense that the planning takes place by individual and autonomous units (individuals and businesses) and those plans are coordinated by institutional mechanisms that lead to an aggregate outcome. That outcome is a result of a spontaneous order that coordinates people’s decentralized plans, not a “top-down” plan that directs the actions of the individuals. The aggregate outcome is not planned by anybody and cannot be foreseen by anybody, including the most farsighted planners, but is the result of a social system that coordinates everyone’s individual plans. As Smith (1937[1776]) noted, in a market setting, people pursuing their own interests are led by an invisible hand to further everyone’s interests.

That spontaneous order is what this article’s title refers to as the invisible hand. The title’s reference to planning is not to the individual plans people and businesses make, but rather to a centralized plan that directs the actions of individuals in a “top-down” manner. Moroni (2010: 138) calls this type of planning teleocratic, characterized by a plan “… that is meant to be rational—that envisages a desired state of affairs, and organizes actions in order to reach that state.” No plan can be so comprehensive as to plan every action of every individual, but the orientation of planning as a profession and as an academic discipline has often been to try to override the outcomes that are produced by the spontaneous order of the market, aiming at a particular outcome envisioned by the planners; that is, to engage in teleocratic planning. When New York City first established zoning in 1916, it was in response to the high-rise Equitable Building that towered over its neighbors, blocking their sunlight. The idea was to override the invisible hand of the market and create a map of acceptable land uses to reduce incompatible uses of land. Land use planning has expanded beyond mere zoning to encompass more comprehensive planning that includes not only land use but also transportation and urban design. Smart growth and the new urbanism are based on the premise that in many instances the invisible hand of the market leads to outcomes that are socially suboptimal. A top-down plan can produce outcomes that are superior from a social standpoint, and so in this sense, planning and the invisible hand are adversaries.

Several issues arise with top-down planning. One is that planners will not have all the information they would need to create an optimal outcome, partly because information is costly to obtain, but also because, as Hayek (1945) emphasized, some information is tacit, meaning that it cannot be precisely articulated and passed along to others. Through experience people learn to make use of information at their disposal even though they may not be able to explain to others how they make decisions in particular cases. Planners could never obtain this tacit knowledge, which is required to produce an optimal plan. Another issue is that planning decisions can become politicized so that decisions are made based on the political power of various interests. Furthermore, when considering planning as a way of mitigating potential conflicts such as those that gave rise to zoning in New York, individuals can bargain to solve such problems themselves in at least some cases, as Coase (1960) noted. In addition, as Jacobs (1961) notes, the spontaneous order of urban development can produce desirable outcomes no planner could foresee, spontaneous order that results from using market forces to coordinate the plans of individual actors.

These criticisms are mitigated somewhat because even the most comprehensive of comprehensive plans leaves most decisions up to individuals and businesses. No plan plans every activity of everyone. A plan that designates a particular area as commercial does not mandate what types of commercial activity can be undertaken there (although it may restrict some types). A plan that incorporates mass transit and bike lanes does not require that people ride bikes. Of course, these things would be possible, and regulations that only allow automobiles with license tags ending in even numbers to drive on even-numbered days and those with odd-number tags to drive on odd-numbered days have been tried. Even those plans allowed a significant amount of discretion. People were not limited in their miles driven, who could drive the car, and so forth. So, the question really is where to draw the line between top-down planning and the bottom-up planning that is coordinated through the invisible hand.

Sometimes, planning will work to counteract market forces and that adversarial relationship between planning and the invisible hand will show itself. Other times, planning will build on the spontaneous order created by the market, and the two will be allies. Moroni (2010) calls planning that supports this spontaneous order nomocratic. This article offers two related arguments on the division between top-down teleocratic planning and the bottom-up nomocratic planning produced by the spontaneous order of the market. First, planning as a whole has insufficiently appreciated both the effectiveness of the spontaneous order of the market and the difficulty of overriding it. Second, when one recognizes the way in which bottom-up planning creates an orderly outcome, one can see that governments have simultaneously planned too much of the affairs of market participants, but at the same time have insufficiently planned their own activities.

Markets and land use

One of the first concerns of land use planning is the potential for incompatible uses of land. Land use planning can prevent a gas station from being built in the middle of a residential subdivision or a cement plant from being located next to an apartment building. However, when one understands the way in which the invisible hand allocates land use, such fears are unfounded. This section draws heavily from the studies of Siegan (1970, 1972, 2009), whose substantial body of work has explained that not only do market forces work against incompatible uses of land but the invisible hand also leads people to employ their land to create efficient patterns of land use through bottom-up planning.

Throughout history, land use patterns have been determined by the transportation network. For most of recorded history, urban areas have developed along navigable waterways because waterborne shipping was the most economical way to transport goods. After this, about 1850 railroads began augmenting navigable waterways as the most significant transportation networks. Towns on main rail lines became major cities, while those that were bypassed by the railroads withered and died. A substantial cattle industry developed in the American West, because cattle could be economically shipped via rail to Chicago, which developed a large meat-packing industry, for example. After this, about 1950 roads augmented rails as the most significant part of the transportation network, especially at the local level.

While one might be worried about a gas station popping up in the midst of a residential neighborhood, that would be unlikely, because that business, like other commercial activities, would be more profitable if it were located on a major thoroughfare with substantial traffic. Business is better when a large number of customers can easily access it, so gas stations, supermarkets, and other retail establishments will naturally avoid locations on quiet residential streets and seek out locations on heavily traveled roads, which are undesirable locations for residences. The invisible hand of the market works to separate incompatible land uses without any top-down planning. Similarly, people will not want to locate their residences on busy thoroughfares to avoid the externalities caused by heavy traffic volume.

A great location for a shopping center is at the intersection of major thoroughfares, which also makes that location undesirable for residences. Thus, the invisible hand naturally leads commercial activity to major thoroughfares and leads residential activity to locations between heavily traveled roads. This provides residences with quiet locations but with convenient access to commercial activity. Industrial activity naturally will locate away from those more central and convenient locations because land is less expensive and convenient access is not as important. Industrial activities benefit from locating near rail lines, which residential users would want to avoid. Thus, with a transportation network in place, there is little reason for top-down land use planning, because the invisible hand not only leads land toward its highest valued use but also leads incompatible uses of land away from each other.

This section offers two key conclusions that are mirror images of each other. First, with a transportation network in place, the invisible hand of the market will lead landowners to use their land in a way that not only maximizes its value to them but also creates socially efficient land use patterns. Second, a transportation network plan must be in place for anybody—private landowners or government planners—to be able to determine both privately and socially desirable uses of particular parcels of land. If people do not have sufficient information to correctly forecast the locations of future transportation corridors, they cannot make land use decisions today that, in hindsight, will turn out to be efficient in the future.

Nuisance law can support the invisible hand

The invisible hand mechanism is—or rather used to be—augmented by the common law doctrine of nuisance, which dictates that people can use their property any way they want, as long as they do not create a nuisance for their neighbors. Critics might argue that preventing a nuisance might require a lawsuit. While true, lawsuits would be the exception rather than the rule, because with a well-established law of nuisance, it would be apparent that an incompatible use of land would create a nuisance that would lose in court.

Zoning has several drawbacks compared with the law of nuisance in preventing incompatible uses of land. The first is that in some cases, zoning may allow incompatible land uses. As an example from my home town of Tallahassee, Florida, Wal-Mart wanted to build a “supercenter” on a major thoroughfare, on land zoned as commercial, that was adjacent to a residential subdivision located behind it and away from the thoroughfare. Residents of that subdivision wanted to prevent Wal-Mart from building, arguing that the large commercial building would create a nuisance to their residences. Wal-Mart was allowed to build, because their store was an allowable land use under the comprehensive land use plan already in place. If that land use decision was instead governed by the law of nuisance, the building might have been prevented through a lawsuit, or more likely, along the lines suggested by Coase (1960), the two parties would have gotten together and negotiated some type of compensation or mitigation that would have been agreeable to both, avoiding a lawsuit. This specific example illustrates the general principle that top-down teleocratic planning can undermine the potential for decentralized planning and gains from exchange by excluding parties who are affected by the activities of others from being able to participate in the planning process.

A second drawback of zoning is that it gives everyone in the political jurisdiction standing on land use decisions that only affect a few local parties. In the same Wal-Mart case, people who lived miles away, but in the same political jurisdiction, entered the debate and approached their political representatives. Some supported the additional shopping venue; others opposed the additional development. However, the impact was more local than regional and the people who lived adjacent to the site should have had more say than people who lived miles away. With zoning, this is not the case, and everyone in a political jurisdiction has the same say over particular land use decisions, regardless of the degree to which those land use decisions affect them. The people who are most affected by the planning decisions have little say in the outcome; meanwhile, others who are little affected gain the same standing as those who are most affected. Centralized planning, of which zoning is one example, turns what should be economic decisions into political decisions.

This lesson applies narrowly to using regulatory mechanisms such as zoning to govern people’s behavior. It also applies more broadly, in that a top-down planning approach invites interest group politics, because interests can steer regulations in their favor. Ironically, regulations that generate undesirable outcomes lead to the demand for additional regulation to counter those outcomes, as Pennington (2005) describes. Moroni’s (2010) argument for nomocracy implies that everyone in the planning process wants to reach a socially optimal outcome and argues that planners have insufficient information to do so when they take a teleocratic approach to planning. The problems with teleocratic planning are multiplied when one realizes that it is subject to political manipulation and interest group politics, as various interests try to use the force of government regulation to produce outcomes favorable to them, which may not be in the public interest.

Overriding the invisible hand

The invisible hand of the market is underappreciated for its ability to generate efficient land use patterns and to minimize the conflict that comes with incompatible uses of land. However, sometimes the goals of planners are at odds with the results produced by the invisible hand. The smart growth–new urbanism movement that thrived in the 1990s, and remains strong, has as objectives creating more compact urban development with higher population density, mixed use development, and shifting individuals from automobile travel to alternative means of transportation. The transportation alternatives, which often are centered around mass transit, include walking and biking. Implementation of these new urbanist policies (as of this writing) has only been attempted indirectly. For example, implementation has not (yet) gone so far as to require that people ride mass transit, but rather has tried to implement transportation goals by facilitating alternative (nonauto) modes of travel, sometimes designing the system to make it more costly and less convenient to use automobile travel.

To see the problems involved in trying to use land use planning to override the invisible hand, consider the goal of creating higher population density through planning. Land use planning can restrict how owners of land can develop their property, but it cannot force development. They can use incentives, such as subsidies, or regulatory cost reductions, as is sometimes done to encourage the development of brownfields, for examples, but even there, developers weigh the costs and benefits and are not forced to develop. If the development envisioned by the planners is uneconomical, no development will occur. However, even when construction occurs exactly as envisioned by planners, that construction only produces a particular configuration of buildings and other land uses. It does not determine population density.

As people’s incomes increase, one of the things they want to buy with their increased incomes is more living space. Thus, with the exact constructed environment, population density will tend to decline as incomes rise. Four people with limited incomes might live in a two-bedroom apartment, with each person sharing a bedroom. If these people have higher incomes, they might live in two apartments so that all four have their own bedroom. Moreover, at even higher incomes, one person might occupy a two-bedroom apartment (I did, as a single person). In this example, population density for that one apartment would be four times higher with four roommates sharing bedrooms than when a single person occupies the apartment. As people’s incomes rise further, it is not uncommon for them to buy adjoining condominiums and remove the walls between them to have even more space, which creates even lower population density.

Lower income families may share dwellings with their extended families, and as income rises, grandparents and siblings are more likely to live in their own homes, lowering population density with no change in structures. As incomes rise, more people purchase multiple homes, meaning that half of the housing units they own (if they only own two) are vacant. These examples illustrate why it can be difficult for land use planning to override the invisible hand to increase population density. Bruegmann (2001: 159) reports that Paris had a population density of 180,000 people per square mile in the mid-19th century, compared with 54,000 people per square mile today, and the Lower East Side of New York City had a population density of about 350,000 people per square mile in the early 20th century, while the city’s population density is about 26,000 people per square mile today. As Bruegmann (2001) notes, declining population density as income rises is a worldwide phenomenon. The data confirm this, and the simple logic behind it is that as people’s incomes rise, they want to buy more living space. Of course, land use planning can have some effect on population density, but it cannot overcome the forces of the invisible hand that lead toward lower population density.

This new urbanist push away from automobile travel goes hand-in-hand with the goal of increasing population density. Mass transit, walking, and biking as means of transportation are all facilitated by higher population densities, while market forces push toward lower population densities. A more important market force working against alternative modes of transportation is that throughout the world, as wealth increases, people want to buy the increased transportation flexibility and convenience that comes with automobile travel. Compared with mass transit, private automobiles travel on schedules set by their owners rather than following bus or train schedules. Private automobiles go directly where their owners want, rather than following predetermined routes. People can change their routes and destinations whenever they want, including mid-trip, and private automobiles can carry a volume of goods that would be inconvenient or impossible to carry using mass transit. Private automobiles allow passengers to choose their own music, their own fellow passengers (if any), the amount of heat or air conditioning, and in general, allow their owners to control the environment within which they travel. There are good reasons why, throughout the world, when people’s wealth increases, they want to buy an automobile rather than travel by mass transit.

Automobiles, and living space, are “normal” goods, to use the terminology of economists, which means that people want to buy more of them as their incomes and wealth increase. Policies that try to create higher density development, and that try to get people to forsake automobile travel for alternative modes of transportation, push against the invisible hand of the market.

Lower density development goes hand-in-hand with increased automobile ownership. Without automobiles, people have to live close to where they work and shop, or near transit stops. Automobile ownership gives people more freedom to live where they want, in conditions they desire. With a declining gradient of land prices as one moves away from the central city, many people will choose to live further from the central city to afford more living space. Automobile travel has also facilitated the development of grocery supermarkets, replacing the corner grocery, which cater to a larger market and can therefore offer a larger selection of groceries (and other goods) at lower prices to a larger volume of shoppers who can carry more with them in one trip. Similarly, “big-box” retailers such as Wal-Mart and large regional shopping centers exist because people can use their automobiles to get to them and to carry large purchases home. This allows retailers to carry a larger selection of items and to keep overhead and prices lower, precisely because customers arriving by automobile give those retailers access to a larger market. This is an old idea, going back to Smith (1937[1776]), who noted that increases in productivity are the result of an increased division of labor and that the division of labor is limited by the extent of the market. The availability of automobile travel increases the extent of the market, which allows a greater division of labor, producing a greater variety of goods at lower prices, increasing people’s standards of living beyond simply the ability to travel by auto.

Land use planners can dictate the type of construction that will take place, but this has only a limited relationship to population density, because as people become wealthier, they buy more living space, which is the same as buying lower population density. Mass transit is facilitated by higher population densities, so the decline in population density as people become wealthier also works against mass transit. The same high-rise buildings produce fewer transit passengers, which can mean fewer trains or buses, lowering convenience and pushing people toward automobile travel. The exodus to auto travel then further compromises mass transit.

Gordon and Richardson (2001: 47) note that in the United States only 3.5% of total commuting trips are on mass transit. While the number is considerably higher in cities like New York and Chicago, even there rising incomes make mass transit less attractive. For the nation as a whole, if the new urbanism were exceptionally successful and managed to double ridership, that would only bring the share of mass transit commuters to 7% and would not even produce a noticeable decline in automobile traffic. Mass transit has no possibility of relieving traffic congestion. Even in places where transit ridership is already high, market forces are working against any increase in transit share.

One strategy of planners is to make automobile travel less convenient to encourage people to shift to mass transit. However, as noted in the previous paragraph, the primary result of this is to increase traffic congestion and further slow commuting times. O’Toole (2009) explains how the new urbanist policies of Portland, Oregon, have increased traffic congestion, pushed up land and housing prices, and made Portland a less desirable city in which to live. Some people like the living environment produced by new urbanist policies. It especially appeals to young single professionals. However, as these professionals get married and start families, they want housing with more space, they would like their own yard, and they increasingly benefit from the transportation flexibility of an automobile. So, they move. Cities like Portland and San Francisco have decreasing school-age populations and are closing schools, as people with families flee the new urbanist lifestyle. Thus, as O’Toole (2007) notes, the plans that planners make are overridden by market forces and planning exacerbates the very problems it was intended to solve.

When the goals of land use planners push against the invisible hand of the market, the invisible hand tends to dominate. One can see the results in decaying cities such as Detroit and Cleveland. Goldsmith (1997), former mayor of Indianapolis, explains how he was able to turn around the fortunes of Indianapolis and prevent it from suffering the same fate as Detroit and Cleveland, by engaging in planning consistent with market forces, rather than opposing them. Such an approach makes sense, not only from the standpoint of successful planning but also when considering individual liberty and the happiness and well-being of people. When planners work to facilitate the goals and desires of citizens rather than to frustrate them, people are better off, and plans are more successful.

Planning creative cities

This line of reasoning has not escaped the planning community, and recent literature has grown around the ideas of Florida (2002, 2005), who notes that cities are more than buildings and infrastructure; they are collections of people. People live in urban areas, as Desrochers (2001) notes, because of the benefits they receive from interacting with their neighbors in close proximity. The vibrancy of cities is a result of the creative people who live there, and Florida argues that successful cities adopt policies to attract and retain the creative class. Florida’s emphasis on the people who live in cities, rather than on the buildings, infrastructure, and physical amenities, points away from land use planning, toward creating an environment in which spontaneous order creates a bottom-up nexus of activities, in which the aggregate outcome is not the result of a central plan.

From a land use perspective, it implies offering the creative class spaces where they can exercise their creativity, not in a manner designed by planners but, following their own plans, producing a spontaneous order that could not be foreseen by people engaged in centralized planning. This line of reasoning supports nomocratic rather than teleocratic planning. As Jacobs (1961) notes, cities stagnate when people are not given the flexibility to redesign the way that urban spaces are used. Holcombe (2011) notes that creativity, as Florida sees it, is entrepreneurship, and the implementation of entrepreneurial ideas requires flexibility not a rigid plan. Even the ideal plan of today will be less than ideal tomorrow, because of developments that cannot be foreseen. Entrepreneurs are often creative enough to find ways around the restrictions designed by planners, but cities will be more successful when they facilitate creativity rather than attempt to get residents to conform to a central plan.

In this context, planning would mean creating a set of rules within which individuals can make their plans, as Moroni (2011) notes, rather than engaging in top-down teleocratic planning. The plan creates a framework where individuals can make their own plans under rule of law, rather than directing individual behavior toward the goals of the top-down plan. Individuals set their own goals, following this line of reasoning, as Siegan (1997) and Moroni (2007) argue, which not only results in a better outcome but also preserves the freedom of citizens who are covered by the plan. The plan is a framework within which individuals make their own decisions, rather than a directive that pushes individuals toward some planned outcome.

The role of the nomocratic planner

As Siegan (1970, 1972, 2009) noted, the most productive use for any parcel of land is heavily influenced by its location relative to transportation corridors. Given the location of transportation corridors, the highest valued use of a parcel of land also tends to minimize conflicts with neighbors and produces an overall efficient pattern of land use. Often, property owners do not know the locations of future transportation corridors, however. Governments own and manage most of the roadway systems in most countries. Land use planning frequently involves specifying in great detail how private owners can use their property, but does not specify the location of future transportation corridors. Governments plan too much for the way in which individuals can use the land they own, but they do not plan enough for the future of the transportation corridors they own and manage.

As urban areas increase in population, and even with a constant population, as population density falls, they develop outward. Yet, often governments do not plan for the location of transportation corridors as areas are developed. A land use map specifies how private parcels of land can be developed, but governments are slow to specify where future major thoroughfares will be located. When this is the case, nobody—not private landowners and not government planners—can make optimal land use decisions. The role of the nomocratic planner is to lay out the government’s plans for roads and infrastructure decades ahead, so that when private land use decisions are made today, they can take account of the location of future transportation corridors and other infrastructure.

In the United States, it is common for governments to locate major roadways after development has taken place. There is a reluctance to plan roads ahead of time, for several reasons. First, there is the smart growth argument that building more roads just encourages more driving. Second, there is a reluctance to plan for roads in particular locations because such planning creates political battles as current residents debate over the merits of the roads and their particular locations. Why fight such political battles now for roads that will not be built for decades? Finally, locating transportation corridors ahead of time runs into the objection that there is no reason for a road in that location, because there is so little traffic.

What often happens is that after areas are developed and bring traffic congestion with them, planners decide they need congestion-relieving thoroughfares. However, after an area is developed, they must choose a corridor that disrupts existing development. The project is more costly, because eminent domain is used and existing structures must be removed, and it is more politically costly because people nearby these projects often do not want them in their backyards. This problem would have been avoided had the transportation corridor been located before development had taken place.

When major thoroughfares are located after development takes place, past land use decisions are inevitably rendered suboptimal. A major thoroughfare that bypasses a shopping center by several blocks takes traffic away and can result in a blighted commercial development. Meanwhile, when the thoroughfare must pass through a residential neighborhood to connect locations, residents are subjected to undesirable levels of traffic and find themselves in locations that, in hindsight, would have been ideal for commercial use. But again, without knowledge of future transportation corridors, nobody can know the best use for a particular parcel of land.

Locating transportation corridors ahead of time does not mean that underutilized roads must be built on them. When future plans call for a multilane divided highway, once sufficient right-of-way is secured, a two-lane road can be built. As development occurs and traffic builds, the road can be widened, but much more effectively if the wide right-of-way was secured ahead of time. The wide right-of-way signals property owners that a major thoroughfare will be coming, making adjacent locations simultaneously attractive for commercial use and unattractive for residential use, which promotes effective land use decisions.

Putting roads in the right location does not require omniscience, because the location of roads determines how adjacent property is best used. This type of transportation planning directs future development without dictating allowable land uses. Certainly, planners want to take account of natural amenities, current land uses, and other factors in laying out future transportation corridors. However, it is often more important that the locations be planned ahead of time than that those corridors be in some specific location. The location of future transportation corridors may be irrelevant to efficiency, because efficient land use patterns will be determined by the location of the corridors, and prior to development one location may be as good as another. The key point is that by designating the corridors ahead of development, they are working with the invisible hand to undertake effective nomocratic planning, rather than working against it by trying to change people’s living and transportation choices.

Conclusion

Land use planning tends to be inefficiently teleocratic and top-down, simultaneously dictating too much about how private landowners can use their property and not doing enough planning for their own future activities, and especially planning for future transportation corridors. If future transportation corridors are planned, private landowners will be led by an invisible hand to use their land in ways that maximize not only the land’s value to the owners but also to create a socially efficient pattern of land use. Planning will be most effective and will maximize its social value when they plan their activities well ahead of time, and as Moroni (2010) says, planners lay out a set of general rules that apply to everyone. This allows a bottom-up spontaneous order to emerge, rather than planning top-down in anticipation of a specific planned outcome. A spontaneous bottom-up order is the foundation for the creative cities Florida (2002) wants to promote. Indeed, planning with a particular outcome in mind is antithetical to the dynamic nature of urban life. Cities can never arrive at a time when a plan is fulfilled, because cities are dynamic and ever-changing. The very best outcome that could occur today will be superseded tomorrow because of the evolving nature of urban areas.

The direct policy implications from Moroni’s nomocracy are that the best plans are those that create an environment within which people can make their own plans. That environment should protect property rights, to ensure that when entrepreneurial individuals make their plans, they can be assured they will reap the benefit. Such an environment erects very low tax and regulatory barriers to creative activity and facilitates the evolution of urban activities rather than locking existing activities and land uses in place. This means minimizing planning elements that restrict individual activities and land uses, but it also means looking further ahead to plan the government’s own activities, most notably, government planning of transportation corridors and other infrastructure. Nomocratic planning means that planning and the invisible hand are allies and that planning is designed to facilitate individuals carrying out their own plans, rather than the teleocratic alternative where planning and the invisible hand are adversaries and plans are designed to thwart the land use and transportation choices individuals desire.