I was just informed my Freeman piece on private cities was reblogged by Don Boudreaux, Arnold Kling, and Isegoria. First off, thanks! It’s fun to see my piece making the rounds, especially as it is one of the first I wrote. Before writing on why private cities haven’t emerged, I’d like to argue that they are going to emerge.
The most promising development is in Honduras. Honduras passed a law allowing ZEDEs (zonas de empleado y desarollo economico). ZEDEs are granted wide degrees of autonomy, being exempted from Honduran civil and commercial law. Currently the Committee for the Adoption of Best Practices is writing a set of guidelines that ZEDEs will have to meet. At least one company interested in Honduras is trying to start a proprietary community.
Beyond Honduras, there are several other countries that have expressed interest in setting up similar zones. There has also been a resurgence in interest cities, with books such as Glaesars Triumph of the City. I think the trend is toward decentralization and one aspect of that will be private cities.
Kling raises three questions as to why there aren’t private cities:
1. Cities must emerge naturally. You really cannot start a good city from scratch.
Reston, Virginia, is a planned community with 50,000 residents. Walt Disney World has 50 million annual visitors. Further, there is no reason to build an entire city from scratch. Though not entirely private, Dubai is probably the best example, setting a regulatory regime to attract foreign investment. Further, there is no reason to build an entire city from scratch. A proprietor could buy 10 square miles, then only set up public goods on a few hundred acres, slowly scaling up as people move there.
2. It is too difficult to acquire the land to start a private city.
I’m not sure I have a very good answer to this, other than personal experience with my involvement in the ZEDEs. In Honduras, at least, there seems to be land available, and desirable to buy.
3. Existing governments will not allow private cities the freedom to operate.
This is the most obvious reason to me, and one that is rapidly changing. See above for a brief overview.
I would like to add a fourth reason.
4. Private cities sound crazy.
While entrepreneurs pursue profit opportunities, businesses tend to evolve rather than be rationally planned. There are usually changes at the margin, rather than the creation of new industries. As such, a capital intensive, admittedly risky, business such a private cities might take longer to emerge than marginal changes to existing industries. The more radical the business plan, the more variance in how long it takes entrepreneurs to discover it.
In Kling’s comments, Patri Friedman argues economies of scale are another potential reason:
The scale could be one reason. It is difficult to raise public capital for extremely large ventures. The cost of a small city compares to that of a large company. And there are huge economies of scale that make it difficult to start small and grow. Think about the famous “double size, increase infrastructure cost by only 85%” rule for cities. So roughly every 16x size increase halves cost. You are trying to compete with established, funded incumbents who are easily 256x bigger than you and thus with 1/4 the infrastructure costs. And with high transaction costs for their customers to leave.
And that’s just looking at the business perspective, which is substantially less than the challenge of obtaining political autonomy.
Which is why the vast majority of successful new cities were sponsored by states, not only recently, but in the past. They have the budget, the skills (running cities is their business, after all), and the monopoly on political power.