By David M. Levy, reason.com
October 1st, 1975
Libertarians who are no doubt accustomed to meeting their ideas in caricature have probably been told that in a libertarian world—one with private streets, private mass transit, private utilities of all descriptions, private ownership of redwood trees and alligators—everything would have an explicit price to it. To walk on the streets, to visit the parks, individuals would be required to make an explicit contract. That this is in fact a distortion can be seen because the real world has been kind enough to provide Walt Disney World, a contractual city which bears no resemblance to the caricature.
It is, I presume by now well known that Walt Disney World is full of marvels. The city has, for example, a smoothly functioning mass transit system, no pollution to speak of, a garbage disposal system which defies belief (garbage is not picked up by trucks—it is disposed of by a network of pneumatic tubes leading to an off-site processing plant), an area for alligators and ecological researchers to admire each other, and fire sprinklers in the buildings. I hope it is not necessary to mention that all this is unusual.
What is not that well known (outside of the economics profession) is why all this has come to pass. The best that a noneconomist has been able to do is to assert that this is Walt Disney's great work of art. Which is, of course, to say it is inexplicable. But even at that, the explanation is a puzzle since Disney productions of all sorts have never had a reputation of sacrificing financial interest to the whims of art critics.
The point of what follows is to work through the incentives provided by the free market which presumably led to the creation of Walt Disney World in its present form. I have no knowledge of the actual decision making—what follows, if you will, is a model which attempts to simplify reality so it can be understood.
Nothing Disney Corporation has undertaken and accomplished should be conceptually surprising. Given the incentives provided by an absence of political constraints, the result seems to be rather automatic. This is not to denigrate in any way the great technical virtuousity which was involved—it is breathtaking. My point is simply that excellence in all things is subject to the usual laws of economic theory: the higher the rewards, the more will be forthcoming.
The important difference between Walt Disney World and other cities is to be found in the ownership of the land. In the case of Walt Disney World, one profit-making entity owns everything; whereas in normal cities the ownership of the land is highly decentralized.
OUT OF SIGHT
Consider one of the standard problems facing a city—that of garbage disposal. There are, of course, many ways to remove it; one method which seems common in normal cities is to stuff it in cans, put the cans in the street and then wait until the garbage trucks remove it. There is a problem with this; that is, the sight and smell of garbage is something which most people would I think pay to be able to avoid. In a normal city it does not seem possible for people to buy their way out of viewing garbage. There are a large number of people disposing of their garbage this way; there are a large number of people being bothered by this method of disposal. (It is dangerous to ignore the fact that in matters of this sort, the same persons are bothering and being bothered.) Each person being bothered would have to offer the others a bribe to find an alternative method of disposal.
Now consider the same problem in Walt Disney World. If Disney Corporation owns all the city land, it is obviously going to have to find some method to dispose of the garbage. If it adopts the standard solution it bears the burden of people's displeasure at the garbage in the form of a reduction in revenue: people will pay less to shop and visit if they have to trip over garbage. Plus, if people will pay less to shop, the rent which Disney Corporation can charge will be reduced. Thus if Walt Disney World adopted a method of garbage disposal which did not bother people, they could charge more rent.
The solution which Disney found—using pneumatic tubes—is probably more expensive in terms of direct cash outlays than trucks and cans. The powerful restructuring of incentives which comes from a local monopolization of the land is precisely that decisions are not made solely on the basis of direct cash outlays. There are costs to people to have to walk through, over and around garbage cans. If these costs are reduced by a pneumatic tube method of disposal, then Disney can charge more rent. If the increase in rent is sufficient to pay for the more pleasant method of garbage disposal, then it is obviously to the interest of Disney Corporation as a profit-making entity to adopt a cleaner method. (If the political process could work as well as some people think it does, then obviously normal cities would have Disney type garbage disposal systems. If you think so, look around.)
In the jargon of my profession, Disney Corporation has by a local monopolization of the land, effected an internalization of external economies. In English, what has happened is that this system of private property has given one decision making entity undiluted responsibility for the affairs of a city. If something goes right, Disney Corporation will benefit. If something goes wrong, Disney Corporation will take it in the wallet.
This assignment of responsibility is spread through minute details. For example, in the calculation of the costs and benefits of fighting fires, it no doubt was realized that if a few dozen people were burned to death every year, Walt Disney World would become less pleasant to visit in proportion to the value which people attach to unfavorable changes in their life expectancy. Thus, in Walt Disney World the buildings have sprinklers.
In typical cities buildings often do not have sprinklers, since the owner of the land counts on the city fire department to fight fires for him—the legal system allows him to slough off the responsibility onto his neighbors. Disney Corporation has no one on whom to slough off the responsibility: it has to fight the fires! It is simply a matter of cost/benefit calculation with respect to which is the more efficient method of doing the job. What makes Disney unique is that its structure is such that all the hidden costs—here the value of change in life expectancy to visitors—are present when the cost/benefit calculations are made.
Amusingly enough, the intellectual guide for all this was written by Prof. Paul Samuelson, who has never been noted for his enchantment with laissez-faire. Professor Samuelson constructed the first mathematical model of what an efficient city would look like, but he did not, apparently, believe that such an efficient city could be produced by either market or political forces. (This work is most conveniently located in the section on the pure theory of public expenditure in his Collected Scientific Papers. Professor Samuelson functions as a latter-day David Hume to believing libertarians.)
The idea that a contractual city would have an explicit price attached to previously state-provided or "public1" services—streets, parks, museums, whatnot—suggests that insufficient attention has been paid to the work on the theory of "public2" goods. We must be careful with words. It is disingenuous to confuse an argument with a pun. "Public1" and "public2" have much the same relation as the "state1" of New York and the "state2" of insanity.
What has been argued by Prof. Samuelson is that the normal market process will not provide such things as public2 goods nearly as efficiently as it will provide bread and autos.
The purest examples of public2 goods are ideas and images: the theorems of Euclid and the poetry of Shakespeare. They are goods which, once produced, can be used by anyone without cost and without less being left for anyone else. A public2 good is one which over a range can be used without cost, in the sense that no extra resources are expended. Impure examples of public2 goods are city streets since after a point a street becomes crowded and an extra person using the street imposes costs on those others using it. The cost here would be in the form of time lost due to congestion.
An important aspect of Samuelson's argument is right if we constrain ourselves to the existing legal system, as Ronald Coase so ably pointed out in his 1960 Journal of Law & Economics article "The problem of social cost." Restating his point: if there were an incentive for (say) private toll roads to emerge in the normal legal structure, then surely somewhere in the country they would have emerged. If the market can provide heroin and gasoline—in spite of the penalties exacted—then certainly toll roads would have emerged.
Where there is a free hand to effect efficient legal systems the production of private roads should be no more surprising than any other commodity. With each legal system, one can associate a set of costs to effect the transactions to provide public2 goods. It seems clear that a Disney World legal system has lower costs of transactions than that of a normal city. It is also clear that it is a nontrivial problem to get there from where we are now.
SO NOW WHAT?
The problem is that it would not do very much good, if any, to sell the governmental part of the cities. Some problems cannot be solved efficiently, as David Friedman suggests in The Machinery of Freedom, by selling the state in small pieces. In such problems as have been discussed above, the whole thing, both private and state sectors, must be combined into one decision making entity.
Another possible solution is to trade the owners of land shares in a corporation which will own the city for their land. Unfortunately, there will be incentives for individuals to hold out for more than the present market value of their land.
The most likely course of action is to let normal cities continue to destroy themselves and to let WDW-type ventures profit. Already people are noticing that some city governments—New York, for example—are bribing their way out of labor disputes by promising higher pensions instead of higher current wages, which presumably will be paid for by higher taxes in the future. If the taxes in a city rise too much relative to neighboring communities, and if the tax rise is foreseen, it will be very much to the interest of people to move, sometime between now and then. This movement will in turn reduce the tax base, necessitating either higher tax rates or reduced services. Either of these will cause more people to leave. It is not at all clear that the situation possesses a stable equilibrium.
Interestingly enough, the resulting contractual city might not be libertarian, if by the latter we mean that everything is permitted which does not physically coerce others. This is a difficult point. One might think that if the restriction of economic activity were a matter solely between the owner of the city and the individual, the outcome would be libertarian because there are no third party interferences. However, if the owner of the city is profit maximizing then it would seem that what influences his decision is really nothing other than third party considerations. If I let Weird Sam expose himself at the bus station what will this do to the city rent? If this activity makes third parties on net willing to pay less then it may well be banned by the owner—even if the owner could not care less one way or the other. What will be allowed and what will be banned will, if the argument above is correct, depends upon how much third parties are willing to pay to live with and without any particular activity.
For example, one cannot drive a car in Walt Disney World nor can one sell pornographic literature. Obviously, these are not physically coercive acts. They are, however, acts which under certain conditions impose costs on other people. Some people are bothered by pornographic literature; that is to say, they would pay to avoid it. In Walt Disney World they have this chance. No doubt, it was long ago determined that a Walt Disney World without pornography would be a more profitable Walt Disney World than one with. (However, Walt Disney World represents a special case with respect to pornography because it is, in addition to being an exercise in economic theory, an amusement park catering to children and their parents. An "adult" version of Walt Disney World might have strikingly different rules.)
It is important, I think, that we not confuse what will occur under a legal system with few transactions costs with what we hope will occur. I, myself, would hope that pornography, prostitution, gambling, etc. would be allowed since I do not believe that these forms of economic activity impose harm on third parties. Nonetheless, they do seem to impose costs on third parties. And if the costs are large enough, an efficient contractual city might well ban them or at least tax them heavily. (If the costs depend on the visibility, these activities might be simultaneously explicitly banned and implicitly tolerated.) It is not possible to define an efficient set of rules or laws for a city without reference to the people who live in and visit the city. The handy rule—everything not physically coercive should be allowed—ignores the fact that cost and harm are states of mind. To detect a state of mind without asking or observing action is rather difficult. Anything is harmful if you would pay to get rid of it.
Of course if the United States were composed of cities run on a Walt Disney World basis, there would no doubt be terribly puritanical communities with respect to sexually explicit literature, cruelty to animals, seat belt usage—all the standard "moral" problems—but there would also be incentives for other communities to cater to individuals' "immorality." (That is, if enough individuals wished to purchase sexually explicit literature which was not allowed for sale in their own city, some nearby city would probably find it to be in its interest to sell it.)
A contractual state of affairs, then, need not be attractive only to libertarians. Religious or moral authoritarians might well pay for the privilege of living in a "clean" city, just as you or I might pay for the privilege of living without religious or moral authoritarians telling us what to do. The country is big enough for everyone to be able to work out the conditions under which they wish to live, if and perhaps only if, a contractual process can be effected.
If the argument is correct, this should be something which will pay nicely. I find comfort in comparing the price paths of New York City bonds and Disney Corporation stock.
David Levy is a Ph.D. candidate at the University of Chicago and an Instructor in Economics at Bates College, Lewiston, Maine.