Reconciling Libertarianism and zoning ... and a sketch of a Pareto-efficient transition to a free-market alternative

Part 2 of 3

(Part 1 can be found here and part 3 here.)

The Proposal

My proposal for zoning via market-based mechanisms is weird (autistic, even ), and requires a lot of explanation to make sense, so there's a temptation to front-load the explanation and then reveal the actual proposal at the end with a flourish, like a magician pulling away a cloth to reveal a rabbit.

It'd be satisfying to do that with a stylistic flourish, but not, I think, not ideal to way to maintain interest.

So, let me blurt out the "clever" idea inelegantly up front:

• property is, in our existing system subdividable ...not just by geography, but by use type and "facet" (e.g. surface rights, mineral rights, water rights, development rights, etc.)

• these facets - again, under our current system - can be and are sold off to different parties, so that one person might own a piece of land, but one neighbor owns an easement (a "non-possessory interest in another person's land") to drive over the land, and different neighbor owns the right to limit development on the land ("a conservation easement")

• most land-use regulations ("zoning") is isomorphic to ("same shape as", with the implication "can be implemented / expressed a different way, in terms of") sufficiently complex easements exchanged between neighbors

• actually engaging in the act of deleting most land-use regulations and replacing them with a network of mutual easements that result in the exact same state of affairs would be very very good

• ... specifically because it would (a) create legibility in the form of price and ownership information, (b) replace political mechanisms with market mechanisms, and (c) create much more fairness when change occurs (replacing "Pareto efficiency" with "Kaldor-Hicks efficiency")

So, with that autistic bomb-drop out of the way, let's back up and discuss a few things, like

• how and why we divide property rights

• how decomposition and recomposition of bundles of rights are good

• the problem with top-down YIMBY big bang reform

• why bottom-up market based mechanisms (trade) is always better than alternatives

• an inquiry into whether its superogatory or even morally required to compensate people when old land-use regulations change in a way that harms them

• the exact mechanism of transition from top-down to free-market land use

• addressing objections re profitteering and irrational obstructors

• a discussions of mechanisms: squeeze-outs, auctions, and assurance contracts

• ab initio allocation of easements

The details of slicing up property are socially constructed

I'm going to lean into the skepticism and say something else that also sound left-coded: "the details of property are socially constructed".

...but it's true!

Just as there's both a dumb version and a smart version of the lefty phrase "beauty is socially constructed" (the dumb version: some societies might find wrinkled faces and bad skin beautiful; the smart version: different societies accent or display underlying signals of health and fertility in different ways), there is a dumb version and a smart version of this claim.

The dumb version (and also the version endorsed by lefties) is that "society" (the government) may legitimately choose to let people own toothbrushes and couches ("personal property") but not welding machines, table-saw, or factories ("private property").

The smarter version is this: just as there area an infinite number of ways to slice a pie, there are an infinite number of ways to slice up property ownership into different pieces, which can then be owned separately. A given society might decide to slice land up vertically ("from heaven to hell"), it might decide to slice it up horizontally (one person owns the mineral rights, another owns the surface rights, a third owns the air rights), it might decide to slice it up temporally (the farmer has sole right to his fields during spring, summer, and fall, but the public has a right to ride snowmobiles over it in the winder), or in many other ways.

Western medieval property was sliced in various odd and interesting ways, including by use. A farmer might own the right to plant and harvest a patch of land, but the widows and orphans of the village might have the right to "glean" the land (scavenge any dropped crops) after the harvest, while the nearby monks might have the right to coppice the trees on the land (but not to cut them down entirely).

[ N.B. that gleaning is still a thing! ]

My assertion is that there is no one morally correct way to slice up the entire pie of land use rights. Different slicing approaches optimize for different situations. It's somewhat instructive to think about alternative technology levels, or social structures, or even alternative fantasy worlds, and think about what way of slicing up rights might work best there.

Now, a very interesting point: under a legal regime that supports contract law, no matter how property rights are initially sliced up, they can be re-sliced in ways that are profitable to all involved.

One case (easements) is so common that it has been formalized into the dominant property rights system. An easement is a contract between a land owner and another party, whereby the land-owner grants certain limited rights to use the land to the other. One example is a land-owner granting a utility company the right to put up utility poles and clear trees near them ...but no other rights to the land. Another example is a land-owner granting an adjacent land-owner the right to access the second parcel via a pathway on the first. A third example is a land-owner granting a neighbor a right to pump from a well and lay pipe across their land to carry the water away.

(I bring up these three specific examples because the farm that I own has, in fact, these three easements granted to three other parties).

...but these three easements are only examples; other grantings of rights are possible. One can, by contract, constrict one's self / grant veto power to another over one's right to build a house or houses on a piece of property (a "conservation easement"), or constrict one's self / grant use to another of development above a certain height ("air rights"), or constrict one's self / grant use to another of underground property ("mineral rights"), or the right of lateral support (I can not excavate my yard down 30 feet thus allowing your yard and house to collapse into the hole), or various doctrines about surface water drainage.

Decomposition and recomposition

Let us go on a quick tangent and discuss decomposition and recomposition.

Decomposition means to take a thing apart into pieces, and recomposition means to assemble those pieces again (often in different groupings).

These are both extremely useful and powerful tools, unlocking huge opportunities and profits.

I could bore you with explaining these ideas in the context of the theory of programming languages, but more interesting examples happen in finance. Various parties are dissimilar in what they value: one party might have an inherent preference for stable cash flows (e.g. retirees), while another party might have an inherent preference for the possibility for outsized upside. In the finance world one can - again, using contracts - decompose single financial objects into components, separating, let's say, the stable cash flow from the upside potential, from the downside potential, and they sell these components to different parties.

There's a temptation to call this "financial trickery" and dismiss it, but by cutting things up and giving people exactly what they want, utility is created - in the same way that using a machine to shell walnuts and sell the bare walnut flesh to one consumer (for easier snacking) and the crushed and pulverized shells to another consume (for air blasting corrosion off of soft metal parts) turns garbage (or perhaps just low-value items) into gold.

Value is, after all, subjective, flowing from individual needs, individual preferences, and individual situations. The apple-lover does not have the same utility function as the orange-lover. The apple-lover who has already gorged himself on four apples does not have the same utility function as the apple-lover who has not yet eaten any apples today. Etc., etc.

The moral of this side-quest is that if we can find a way to solve the negative-externalities-with-property problem that involves decomposition and recomposition, that's actively good.

Ok, tangent over.

Big Bang Reform

I take it as given, and - hopefully - universally agreed upon that reform is only desirable if society as a whole is made better off.

In economics there is a term for this: "Kaldor-Hicks efficiency" , and it means that a change in a situation that creates more utility than it destroys. An example would be a a government taking a 5'x5' easement from a property owner to install a utility pole, which causes the property owner $15 of loss, and creates $20,000 of utility for other neighbors on the street.

Let's apply this to a typical YIMBY example of why we need to change land use laws:

"In neighborhood X there is a 1 acre minimum lot size. 99% of the citizens who live there would prefer higher density ... and would also love to profit by selling off their front yards to new owners, would could build ADUs or well designed duplexes. This would also create new housing for 800 people. The total utility gains are in the tens of millions of utils [ translate: dollars ]. The water, sewer and electric infrastructure is all capable of supporting the new movers. Would it not be right and just to change the zoning to allow this, and also to allow coffee-houses, e-scooter bike charging racks, outdoor busking, and a small arts center?"

This is a strong hypothetical - the absolute best-case for YIMBY reform. The Kaldor-Hicks efficiency improvement here is undeniable.

...and yet, I would ask: "You said 99% of the citizens. Tell me about the 1%".

"Ah, yeah, there's one guy who's lived there for 50 years. He really hates noise, he hates people on the sidewalk, and he loves looking out at the massive maple tree across the street that he and his kids helped plant 45 years ago."

I'd reply "So we agree that this one guy will dislike the changes?"

"Yes, but it's just one man. And he could, IDK, move or something. You've got to break a few eggs to make an omelet."

Do you?

"Well, yes. I mean, even if we do util math, he only loses a little bit, and the community as a whole gains so much!"

Ok, we've recreated "The Ones Who Walk Away from Omelas" - we've decided that hurting people is ok, and now we're just quibbling about the price.

(If you think I'm stretching Le Guin's point, note that she explicitly said that her story was a critique of utilitarianism).

So, while the proposed change is better for society as a whole, I still reject it because it makes one person worse off.

You might be tempted to respond: Travis, you're going to be such a left-wing bleeding heart that one person can't be even mildly inconvenienced (and simultaneously such a libertarian deontologist that you refuse to infringe on anyone else's rights even a microscopic amount), what do you propose?

I'm glad you asked. My response is that...

There are no losers when there is trade

A decent chunk of of my ethics, and a large chunk of my politics, comes from Anarchy, State, and Utopia by Robert Nozick.

One point among many that Nozick made is that if two people both freely consent to an exchange of goods, we know that the are both better off than they were before. He followed up by saying that that if the world starts at state 1 and the distribution of goods is "fair" (in some sense), and two people voluntary exchange goods leading to state 2, and this is also fair, and via proof by induction, any sequence of voluntarily trades will just map us from a fair distribution to another fair distribution to another.

(This is similar to the first principle in "welfare economics" (which has nothing to do with the social program known colloquially as "welfare"):

"competitive markets, under certain assumptions, lead to Pareto efficient outcomes."

...but there's a footnote: what exactly do we mean by "freely consent" ?

The philosopher Michael C. Munger coined the phrase "euvoluntary exchange" in a paper in 2011, and defined it as "an exchange that is truly voluntary and that benefits both parties to the transaction."

My friend Sam Wilson broke the concept down further: exchange is euvoluntary when there is

1. conventional ownership

2. conventional capacity to buy/sell

3. absence of regret

4. no uncompensated externalities

5. neither party is coerced by human agency

6. neither party is coerced by circumstance; the disparity in BATNAs is not "too large"

A transaction that both parties walk away from happy is the best kind.

So, if we have a proposed reform that is a Kaldor-Hicks efficiency improvement, there is absolutely sufficient utility being generated that we can spread some of it around in order to compensate the one party who is suffering a loss, to the point where he is not only made whole, but is actively made better off than he was before.

(The idea that no one should be worse off than before a reform is codified in the fifth amendment to the US Constitution as "nor shall private property be taken for public use, without just compensation" and I was first exposed to the idea that all participants must be made actively better off when I read "Takings: Private Property and the Power of Eminent Domain" by Richard A. Epstein https://www.hup.harvard.edu/books/9780674867291 ) and had recourse to this idea again later when Kelo vs City of New London was in the news.

If “improving things on net, but not necessarily for every participant” is called Kaldor-Hicks efficiency, what's the name for "improving things on net, and also for every participant"? Pareto efficiency.

So, for me it's a moral requirement that any zoning reform be Pareto efficient.

In practice, what would that mean? An example:

On a country lane there ten large farms, each objectively worth $1M. Seven of the owners realize that under certain reforms, they can sell their farms to developers and each farm can be redeveloped into twenty quad-plexes, thus creating 560 new homes, and housing 2,250 citizens. These seven farm owners would each be able to sell their farms for $2M, profiting $1M apiece (and creating an addition $2M of value from each sale which is not captured by the sellers, but by others). Three of the ten farm owners prefer that the street remain rural, and do not wish to sell. Further, these final three owners have idiosyncratic preferences, and value their farms their current state at $4M apiece, but values them when surrounded by dense development at $1 apiece.

Under Kaldor-Hicks efficiency, we'd merely do "big bang" reform, change the zoning code, create 7 x $3M = $21M of increased value for the seven farmers and the hundreds of families moving in, and destroy 3 x $4M = $12M of value for the hold-out farmers, thus creating $9M of net increased value.

Under Pareto efficient reform, we'd come up with some way to redistribute some of the gains from the first seven farmers and the new homeowners to buy the last three farms for at least $4M ... still leaving the same amount of increased utility across society.

The easiest way to do this is to for the government to tax the beneficiaries of the zoning reform, and then make disbursements to the victims, but there are a variety of problems with this:

• there's no easy way for the government to correctly determine the value that the last three farmers place on their farms.

• there's no mechanism to stop the other seven farmers from exaggerating their own values so as to get in on the "cash giveaway"

• by placing the whole thing in the hands of the government, we create all of the usual principal agent problems where unskilled and uncaring bureaucrats are making hugely impactful decisions for other people

The answer to this is to use market mechanisms.

Prices are, after all, information.

Next time

In the third and final installment we'll look at morality - should we use such a scheme? - and the mechanisms: how do we get from here to there, what do we do do about profiteering and irrational obstructors, and how tools like squeeze-outs, auctions, and assurance contracts can help us build a better system.

Part 3 can be found here.