Econ 101: Should the Government Plan Cities?
Using central planning to rebuild New
Orleans is misguided Ė property owners, not the government, should
be allowed to decide the best use of their property.
By Gary Wolfram, Ph.D.
Free Market Project adviser
October 12, 2005
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, itís 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 Ė Nobel Laureate Friedrich Hayek and the great Austrian
scholar, Ludwig von Mises Ė explained the inefficiency of central
planning. Its failure in practice led to the Iron Curtainís 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 itís 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 canít 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
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
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 arenít 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
plannersí 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 Free Market Project.