Free-Market Community Governance

            Community Governance under whose heading I include: roads, municipal infrastructure (water pipes, sewers, power lines, gas lines, etc…), zoning rules, aesthetic/architectural standards, parks and other public spaces, community events, etc… ‘Surely,’ the statist would say, ‘even libertarians must admit that Community Governance cannot be provided without government intervention. It is fraught with externalities, natural monopolies, and potential free-rider issues. Without some government coercion greasing the wheels, nothing would get done and everyone would be worse off.’ To this, I would respond that I by no means admit it, and that these things could be provided better by private individuals acting voluntarily than by coercive governments. In this post, I will explain how.

           

           Consider the case of hotels, apartments, office buildings, shopping malls, and condominiums: what do these things have in common? They are all ‘multi-tenant’ buildings that also have ‘common areas’ that are built and maintained by an organization that has the incentive and the means to do the job well. Hallways, swimming pools, central HVAC systems, lobbies, forums, etc… These common areas or common elements are typically not in ruins and dilapidated (except in some rent-controlled apartment buildings, but that’s another issue), because of the fact that the owner or manager of the building has an incentive (increased tenant satisfaction which leads to higher rents or property values) and the financial means (common area fees built-in to rent or collected as condominium fees) to keep these common areas and elements in good condition, and perhaps to improve on them or build more.  

            

           Now, take this multi-tenant/common area model, and imagine applying it to geographical communities separated by outdoor spaces rather than to just single building complexes. The occupants of individual residential and commercial buildings would constitute the ‘tenants’ in the ‘multi-tenant’ model, while what I described as Community Governance would constitute the ‘common areas/elements’ in that model.  Just as hotels do not need governments to build and maintain their swimming pools and HVAC systems for them, so communities organized under such a model wouldn’t need governments to intervene in Community Governance production or in urban infrastructure.

           

           Let us now consider how such communities could be established under a libertarian regime. Imagine that a property development company purchases a field on the outskirts of a city and decides that it would be profitable to make the land suitable for a mixed residential/commercial community. The developer knows that the only thing the government will do for his property is to provide basic law enforcement/police protection services, it will not involve itself in urban infrastructure or Community Governance in any significant way.  The developer will proceed to build some residential houses or multi-tenant residential complexes on some of the land, perhaps build some buildings destined to be commercial ones in the centre, connect everything with roads and urban infrastructure (sewers, water pipes, power lines, gas lines, telephone/internet cables), and perhaps build some public spaces such as squares or parks. This done, the developer now has three main options, which he will select, other things equal, based on the financial returns that they each offer. These options are:

1. Multi-Tenant Income Property: The developer either retains ownership of the land himself or sells the whole land package to a property management company. The property manager then leases out spots in residential and commercial buildings and maintains the common areas himself with some of the rent collected, doing so in order to maintain or increase the level of demand for his property and the rent that people are willing to pay. Hotels, apartments, shopping malls, office buildings, and industrial parks all employ this model currently, and it seems to work just fine, as long as tenants don’t mind or prefer leasing rather than owning property.

2. Condominium Arrangement: The developer subdivides parcels of the land but then binds them together in a contractual condominium arrangement. The condominium association would be given ownership of the common areas, the duty to maintain them, and the ability to levy condo fees from unit owners in order to pay for common areas and elements. This done, the developer would then sell units to those that wanted them, with the condominium arrangement and contract attached to the property, which would affect the market value of the property accordingly. The contract would probably provide for periodic elections for the Board of Directors of the condominium association, and once established, the Board would probably decide to hire a property management company to attend to the day-to-day operation of the common areas, elements, and services. This is the model used by condominium buildings around the world, and though the administration of the building might not be as smooth as under a multi-tenant income property arrangement, it is attractive for people who want to own property rather than lease it, but who also want to take advantage of the common area/element provisioning abilities of a collective arrangement.

(Note: Under the condominium arrangement and the multi-tenant income property arrangement, multi-tenant income buildings and condominium buildings could also exist, and they would just constitute a condominium arrangement within a condominium arrangement, a multi-tenant income arrangement within a multi-tenant income arrangement, etc…)

3. Free-Hold + Associations: The developer subdivides the land and sells each individual land parcel separately. Roads and the municipal infrastructure on them or underneath them cannot exactly be subdivided, so they are given to a newly-formed Road and Infrastructure Association to maintain. Membership in this association for land owners is mandatory, and fees can be levied for road and infrastructure maintenance (more detail on this below). If the developer built parks or other public spaces, he could either continue owning them himself and try to use them as income-generating properties (park admission fees, retaining ownership of commercial buildings on the public spaces and charging extra rent for to tenants of these buildings), or he could leave them to a Parks and Public Spaces Association, which would be funded by fees collected from members in the community who joined voluntarily. The maintenance of common areas would probably be choppier and more dependent on community spirit and voluntarism under this arrangement, but this arrangement would probably still be feasible in most cases, and would give people the full satisfaction of complete property ownership.   

            

           Whichever of these three options is chosen, the result is a market-based community development and maintenance process that requires no coercive government intervention beyond the provisioning of basic law enforcement services.

           

Some may now ask though: what is the point of this whole exercise? What makes these private land authorities (whether they be multi-tenant income landlords, condominium associations, or road and utility associations) any different from the municipal governments that already exist? While there are a few similarities between these private organizations and municipal governments, there are also some significant differences that distinguish private organizations for the better:

1. Smaller zones of authority=more competition:

In a free-market system, there often exist both economies and diseconomies of scale, pushing free-market organizations towards the optimal size for their type of organization. Though I don’t know for sure, I would guess that for the kinds of arrangements discussed above, the interplay of market forces would result in an average community size that covers a significantly smaller area than the average municipal government of today. This is because the larger private land organizations got, the less opportunity for differentiation of communities in the market there would be, and the harder the effective governance of these larger communities would get, particularly in the case of condominium arrangements.

I suspect that something like what we now consider as a semi-integrated ‘community’ within a larger urban area (the area around Yonge and Lawrence, Jane and Finch, Sheppard and Yonge, etc…), where the quality of public spaces/common elements have a real, noticeable, impact on the desirability of every tenant or owner’s property would prevail as the optimal size on a free-market. If so, this would mean something on the order of 60 or so self-governing communities within what is now governed by the City of Toronto. Many of these communities would be forced to compete with one another to attract tenants and residents, and the result would be a continuous tendency towards improvement in the quality of Community Governance.

2. Regulated by the profit motive rather than by the blunt hammer of elections:

           
         For any organization with authority over community affairs, whether private or governmental, there must be some way of holding them accountable to the residents of that community and making them responsive to the wishes of those residents. In the private sector, it is the profit motive that performs this function. In the case of a Multi-Tenant Income Property arrangement, this is obvious. The more the landlord of the community can make his community attractive to existing tenants and potential tenants, the higher rents he will be able to charge and, provided that the costs of making the community more attractive are less than the higher rents he will be able to charge as a result, the more profit he will net for himself. In a condominium arrangement, the stakeholders (the condo unit owners), have an interest in making their community attractive, both for their own current benefit as residents and for the sake of raising the market value of their property in case they want to sell their property or use it as collateral. Similar considerations apply to a Free Hold + Associations arrangement, although the process of keeping the community attractive might be a bit choppier and might be subject to free-rider problems in certain cases.

           

           For governments, on the other hand, it is popular elections that supposedly perform this regulatory function. However, governmental elections are too unfocused, deal with too many issues at once, offer too few options, occur too infrequently, and are too dependent on the personalities of politicians, in order to be effective, precise, and timely means of holding the government accountable to residents and making them responsive to the wishes of residents. Timely, precise, and incentive-heavy signals sent by the property markets via the profit motive are a much better means of making community organizations accountable and responsive.        

3. Once the transition period is over, joining these arrangements will be voluntary and not imposed on anyone:

            
           Once the transition period from the current statist system is over (discussed below), people will have to literally ‘buy-in’ to these private community organizations in order to be associated with them. People will weigh the quality of the community organization and the Community Governance, in addition to such factors as location and building quality, when deciding what property to buy. If they choose to buy or lease a property that is associated with a community organization, they will choose to associate themselves with that organization and choose to take on all that that entails (which can vary based on the specific contract) as part of the package deal for the property.

           

           If you still think that this should be defined as a government, then it would be a government where people actually would have to sign a real ‘social contract’ voluntarily in order to be under its rule. This is unlike the current governments, whose legitimizing ‘social contracts’ our ancestors supposedly agreed to somewhere in the mists of history, and which for some reason are still considered binding on us.

4. Different arrangements (multi-tenant income property, condominium, free hold + associations) to experiment with, rather than unitary one imposed by government:

            
           Under present arrangements, there is really no choice when it comes to the form of Community Governance: buildings will be owned separately and ‘common areas/elements’ will be provided by municipal governments out of the funds obtained from the unavoidable, coercive levy of taxation. Under free-market arrangements, people will be free to experiment with different methods of community organization. Perhaps some will prove superior and will win out over the others: perhaps multiple models will co-exist and cater to different groups of people. The coercive, uniform, statist method cannot tolerate this diversity, the flexible free-market is perfectly suited for it. How can we ever know which modes of community governance work better than others if the government never lets us try them out, instead simply imposing its own monopoly model on everyone?  

           

           I understand that the ideas and arrangements I am presenting will be unfamiliar and seem strange to many people, and many objections are bound to be raised to them. I will now take the opportunity to pre-emptively address some of the likely issues and objections that will be raised:

1. Transition Period:

            
           Some of the trickiest issues to solve are connected to the transition period. So far, the real estate markets and the actions of those involved in them have been guided by the supposition that it is the government’s responsibility to take care of urban infrastructure and other community governance issues. Municipal governments levy taxes as they will, and provide urban infrastructure as they will: in their private capacities, real estate owners were not really involved in the decision-making processes. How to get from this current, statist situation to the free-market arrangements described above without sacrificing the interests of current real estate owners?

            

            Well, I think that the first thing to sort out is ownership of the streets. It is obviously unfeasible for each owner of a subdivision to own, completely independently, the tiny stretch of road adjoining his property. What should be done is to (somewhat arbitrarily) divide urban areas into ‘neighbourhoods’ of moderate size, and then give every property owner in that neighbourhood shares in the ownership of the streets of that neighbourhood, based on the amount of street frontage of his property. The resulting corporation would be the Road and Infrastructure Association of that neighbourhood. This corporation would take ownership and thus decision-making rights over the streets of the neighbourhood, along with any municipal property on those streets and the real estate-based decision-making rights regarding any private infrastructure projects (such as telecom infrastructure) on the streets.

            

           For real estate owners in that neighbourhood, membership in the Association would be both automatic and mandatory. The Association would need funds to administer, maintain, and perhaps improve the roads and infrastructure, and would have the right to collect such funds either through levies of members or through charging road tolls or taking a cut of infrastructure rates. Membership would be mandatory for the simple reason that any property owner is going to be using the streets and the infrastructure, and it would be unfair if they could just access the benefits without paying their share of the costs. Though necessary due to the tricky transition period, forcing people to join community organizations is opposed to the spirit of my proposed reforms, and thus the powers of the Associations would have to be strictly limited to avoid abuse. Any funds collected would have to be through per-share levies of members or through uniform, level of service-based fees, no discriminatory pricing allowed. Also, the Associations could only collect the amount of funds necessary to do their job with regards to road and infrastructure, they would not be able to collect and use funds for other purposes, nor amass an unreasonably large reserve fund.

            

           With regards to the size and location of the somewhat arbitrarily determined ‘neighbourhoods’, they would certainly not be set in stone. Free hold property owners with ownership shares in a neighbourhood road corporation should be allowed to secede from that corporation under certain conditions. Firstly, they would need the agreement of every owner on an area of road the size of at least a standard city block in order to do anything. Secondly, to avoid the creation of a chaotic neighbourhood structure, any neighbourhood would have to be a minimum size, perhaps 5 by 5 standard city blocks or something like that. If everyone in such an area agreed to secede, they could start their own neighbourhood. Or, if city blocks were on the borders of adjoining neighbourhoods, they could choose to secede from their existing neighbourhood and just tack themselves on to the adjoining one, provided a majority of shareholders of the neighbourhood they wished to join agreed.  

            

           Now, this initial arrangement might seem clunky and inefficient, and it probably would be. A certain degree of this is inevitable in any transition arrangement, where the governments made a mess of things by not letting voluntarism structure the real estate market from the beginning. It will be nowhere near as simple and clear-cut as the developer and his field which we used as an example above.

            

           Nevertheless, this clunky initial arrangement still has the potential to evolve into the more sophisticated community forms discussed above. One thing property owners could do is pool their properties and the road ownership shares connected with them into a condominium arrangement. If more than 50% of the property owners in a neighbourhood agreed to do this, the condominium could take a controlling share in the Road and Infrastructure Association, and with condo fees levied from its members, could provide other Community Governance services as well. Similarly, property owners could sell their properties and the road ownership shares connected with them to a property management company, and then lease their former properties from the company, thus establishing a Multi-Tenant Income Property arrangement if more than 50% of the owners decided to sell.

It is true that there may be some hold-outs who refuse to agree to the condominium arrangement or to sell to the property management company. They would retain their membership in the Road and Infrastructure Association and continue paying the dues and fees associated with those services. They might, for a time, ‘free-ride’ for some of the services a condominium or Multi-Tenant Income Property organization might provide for the community. As time goes on though, and property is bought and sold, the significance of this ‘problem’ will probably be reduced as the condominium or landlord continues to try to buy up those properties. In any case, we can by no means condone the forcing of anyone into association with any condominium or landlord, as this would destroy the whole point of the reform, which is for voluntarism and free-market considerations to prevail as much as possible in the community organization market.   

2. Coordination Issues:

For most community organization purposes, it would seem that municipalities are currently too large. Nevertheless, in some areas of infrastructure coordination, these bigger units may be somewhat more suitable than smaller ones.

For instance, let’s say that an energy company has a power plant at the outskirts of Toronto. It wants to sell its power to consumers in Toronto. In order to do so, there needs to be infrastructure that can connect the power plant to the buildings of all the consumers that want to purchase the power. This will invariably mean power lines going through multiple different neighbourhoods, owned or organized by different organizations. What if some neighbourhood organizations are unreasonable and do not allow the power lines to cross their neighbourhood streets? (Let’s assume that these neighbourhoods get their power from another, competing company). Are the neighbourhoods that want the power from this company but who can’t get it because of the obstructionist outer neighbourhoods out of luck?

Firstly, something like this would only really be a problem, if then, in the transition period. Otherwise, if a power company is building a new power plant and intends to sell the power generated in this plant to the residents of Toronto, surely, before building the plant, it will ensure that it has the contractual right to build the requisite infrastructure through the relevant neighbourhoods. If they know that the neighbourhoods are by no means going to allow their infrastructure through, they will locate the power plant somewhere else where neighbourhoods are more accommodating. Secondly, if neighbourhoods really are just being unreasonable obstructionists, the government should be allowed to use their power of eminent domain, in these rare circumstances, to force the neighbourhoods to allow the power lines through, provided that they are compensated more than reasonably for the trouble.      

In some cases though, it’s not just a question of third party companies building connective infrastructure, but of an infrastructure service that really has to be provided in a coordinated manner city-wide. The most obvious example of this would be water and sewage. In Toronto, water is pumped out of Lake Ontario, purified, and then pumped into the homes of consumers. When the water the consumer uses goes down the drain, sewers take it to another water treatment plant, where the water is purified, and then put back into Lake Ontario. This circuit is really city-wide, and the relevant infrastructure really should be coordinated as such. Does this mean that we need the mega municipal governments after all?

No, and here’s why: Just as individual property owners can join together to form Road and Infrastructure Associations, so the various community organizations in a city (be they condominium associations, Road and Infrastructure Associations, or community landlords) could get together to form a Toronto Water and Sewage Association. They could take shares and decision-making rights in the association based on agreed-upon criteria, and then this association could be responsible for coordinating Toronto’s water and sewage services (it might run the water treatment plants, and perhaps lay down rules that the owners of community water and sewage systems must follow if they want to keep receiving the services). Community organizations would be incentivized to do this for the same reason that they are incentivized to provide good community services for their own neighbourhoods: because having a good sewage and water system would increase the property values and rents of the properties that they are concerned about. Neighbourhoods wouldn’t just compete against neighbourhoods, but cities would also compete against cities, and to do so effectively, sometimes the neighbourhood organizations of that city would have to cooperate to achieve a common end such as good water and sewage services.     

3. Land Monopoly Issues:

            
           Some readers will undoubtedly be concerned about a potential monopoly issue under this arrangement: what if one big property management company buys up an entire city and becomes an unaccountable monopolist who no longer cares about serving their clients well? In general, most people unjustifiably assume that the free-market is characterized by strong monopolistic tendencies. In actual fact, there is not much evidence for this belief. Most monopolies or near-monopolies have been the result of government decrees or interventions or have been protected and favoured by government interventions. In our particular case, I think that the diseconomies of scale would kick in and prevent any property management company from administering too many complex urban areas at once. For condominium arrangements, the diseconomies of scale would kick in even earlier, due to the participatory nature of condominium associations.

            

            If some readers’ hearts are not yet stilled though, I am willing to support a piece of (probably superfluous) legislation prohibiting any company or associated group of companies from owning more than 30% of the land in a municipal region (such as Toronto).

4. Unreasonable Regulations Issues:

            
           What if condominium associations or multi-tenant income property landlords insist on unreasonable rules and regulations? What if, for instance, some of them decide to fine gay residents, or fine people who don’t wear the mandated funny hats at all times, or fine property owners who don’t put a shrine to the Baby Jesus in their buildings?

            

           Firstly, it is highly unlikely that an organization that is interested in its property values will do so. Multi-tenant income property landlords, if they insist on silly regulations for their tenants, will create reduced demand for their properties, resulting in lower rents that people are willing to pay. In addition, tenants who don’t like the rules will be free to cease renting and find a new place. Similarly, condominium associations who insist on such rules will reduce the property values of all their constituents, which won’t be popular with them, and make their lives more onerous, which also won’t be popular. And, people can always sell their condominiums to people who don’t mind the silly rules and find another property where the rules are less silly.

            

           Again though, if people are still worried about unreasonable landlords and condominium associations, I don’t mind supporting some, largely superfluous, legislation in this case as well. The legislation could state that regulations made by condominium associations or by landlords can only apply to common areas/elements, to the external look of buildings, and to functional building features such as fire safety provisions. They may not apply to the interiors of tenants’/condo owners’ buildings (no regulations about what colour their furniture must be for instance) and they may not be aimed at the person of tenants or condo owners (no being fined based on personal characteristics such as sexual preference or based on the specifics of personal attire).

These general rules, plus the self-interest of condominium association leaders and multi-tenant income property landlords, will serve to minimize the issue of unreasonable rules and regulations, making it pale into comparison besides the same issue when applied to the current system of monopoly government community control.

So, there you have it, a discussion of private, free-market alternatives to the supposedly ‘vital’ government intervention in urban infrastructure and community affairs. So the next time you hear someone say that the free-market couldn’t possibly provide effective Community Governance, tell them that they shouldn’t be so sure, the free-market would probably overcome the government in this area too!