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Econ 101: Should the Government Plan Cities?

     In the aftermath of the hurricane destruction caused by Katrina and Rita, much has been made about government plans for the reconstruction of New Orleans. While this may seem to be a reasonable thing at first glance, its time for a reminder that central planning cannot make efficient use of resources.

     We must not forget the lessons of history. Two economists, beginning in the 1920s Nobel Laureate Friedrich Hayek and the great Austrian scholar, Ludwig von Mises explained the inefficiency of central planning. Its failure in practice led to the Iron Curtains fall, and its failure is the reason China, India and other undeveloped economies have recently turned to market capitalism and are experiencing a growing middle class.

     In an economy based upon central planning, the planners decide what is to be produced, where its produced, how much is produced, and how it is allocated. Consumers get whatever they receive from the planner. But the problem, aside from trampling on individual freedom, is that the central planner cannot possibly gather all the information necessary to figure out the correct amount of resources. He cant know exactly how much of different items will be used in the production of different goods and services and how much of each good and service consumers will want.

     In contrast, in a market economy consumers decide what is produced and how resources are allocated through a system of voluntary exchange. Producers must use their resources to produce something that consumers find valuable, or else they will go out of business.

     Unfortunately, this lesson seems to have been lost on those who would have the government of New Orleans, helped by the leaders of select special interest groups, decide how the city will be rebuilt. How can a planning agency know whether a particular piece of property is more valuable as a residence or a health food store? How can the members of this agency decide how many lots consumers would want to have made into condominiums and how many into single family homes?

     While the government may have a role in determining street layouts, the size and location of levees, and other infrastructure, the best way to plan for individual parcels of property is to allow the market process to work. Property owners will best make decisions about their property. If you had a home that was swept away, you should be the one to decide what you want to do. If you wish to take your insurance money and rebuild what you had, you should be able to make that decision. If you did not have insurance and wish to sell the property to a developer, you should be the one to decide that.

     Private developers and property owners will each make a decision about what they think is the most valuable use of the property. In every case, they will be taking a risk. The risk is that the cost of redeveloping the property may be greater than consumers will be willing to pay for that development. A developer might pay $10,000 for a lot, put $100,000 of resources into building a house, and find consumers are only willing to pay $90,000 for it. Such developers would go out of business. On the other hand, consumers might be willing to pay $180,000 for the house. In that case, the developer would remain in business. In either case, it will be the consumers who decide how the property is used, determining which developers are efficient and which ones are inefficient.

     Contrast this with a planning agency making such decisions. The members of the planning agency arent taking a personal risk in deciding how they think properties should be used. Since the development will be made through the political process, different developers will attempt to influence the plan. New Orleans will be made in the image of a few individuals. In the end, those developers who can get themselves connected most closely to those few decision-makers will get the development plans that favor them. The planners take no individual risk, yet they assess what consumers are going to want. Indeed, they may ignore what consumers want except as reflected through the political process. It is unlikely that planners decisions will match what consumers would have wanted.

     While certainly there is a role for government in the rebuilding of New Orleans and the many communities destroyed by the hurricanes, the property owners are best situated to decide the most valued use of their property. Developers who have their own money at risk are best situated to determine what consumers are willing to pay for. It would be a shame if the lessons of the Soviet Union and failures of central planning are lost in the enthusiasm for rebuilding one of America's great cities.


Dr. Gary L. Wolfram is the George Munson Professor of political economy at Hillsdale College in Hillsdale, Mich. He also serves as an adviser to the Business & Media Institute.