My Journey from Free Market Ideologue to Strong Towns Advocate, Part 7: The Nature of Markets

I’ve suggested that a free market ideologue is someone who reflexively equates what they perceive as positive outcomes with the market system they believe in, and quickly blames the negative outcomes they perceive as signs of government intervention.

I used to be a free market ideologue. I believed that my work planning and engineering the systems that created single-family homes on the far reaches of town, big box stores at major intersections, and drive-through dining along the frontage roads, was merely an extension of the greater free market at work. I considered my views to be informed and rational.

My faith in markets, and my belief that the world as I perceived it represented a natural market outcome, was shaken by a series of discoveries, collaborations, and introspections. I came to understand how I was human, so very human, and far less rational than I am comfortable with.

Further, I came to appreciate how cognitive biases—including temporal discounting and confirmation bias—would induce groups of well-meaning people working with cities to highly value the immediate cash flow that came with horizontal expansion and to deeply discount, if not outright ignore, the much greater long-term liabilities associated with their growth pattern.

I’ve called this the Growth Ponzi Scheme, the inducement of an Illusion of Wealth followed by stagnation, debt, and decline. It’s a cycle not only found in cities but reflected in many of the macroeconomic systems established at the end of World War II. Our local governments, like our overall economy, swim in a sea of short-term financial inducements, many from centralized sources. Decades of pulling prosperity forward has created the tension and growing instability that defines our times.

In searching for answers, attempting to reconcile my belief in markets with my new understandings of cities, I was forced to struggle with the very nature of markets themselves. What does it mean to actually support a market-based approach, and how would that actually work in a complex society and not merely the theoretical fantasy world of my intellectual youth?

What is a Free Market?

I’ve never argued that the proliferation of single-family homes, big box stores, and franchise restaurants across America is an anti-market outcome. In fact, I’d argue the opposite: These things are definitely outcomes of the market we have created. It’s not whether or not they are market outcomes, but the nature of the marketplace itself, that deserves close examination.

I searched for a formal definition of “free market” and found many similar thoughts. As one representative example, the website Investopedia suggests three characteristics of a free market:

  1. A free market is one where voluntary exchange and the laws of supply and demand provide the sole basis for the economic system, without government intervention.

  2. A key feature of free markets is the absence of coerced (forced) transactions or conditions on transactions.

  3. While no pure free market economies actually exist, and all markets are in some ways constrained, economists who measure the degree of freedom in markets have found a generally positive relationship between free markets and measures of economic well being.

There is nothing offensive or obviously wrong with this definition, but I find it incoherent in the way I’ve come to find much of economist-speak incoherent. Investopedia suggests that free markets have three characteristics. The first characteristic they offer is actually two characteristics, not one. I’d summarize the two parts of criterion (1) above as: (a) voluntary exchange, and (b) without government intervention.

The second “characteristic” in this definition is merely a restating of the first; the “absence of coerced transactions” is merely another way to say, “voluntary exchange.”

The third characteristic then listed isn’t a characteristic at all. It starts with a denial of the premise of the definition (free markets don’t actually exist), followed by an elaboration on that startling insight (all markets have constraints; none are free), and then hedges the admission with a value statement (the freer the better).

Economists like to think of their profession as being more akin to the harder sciences of physics or mathematics than the softer sciences of psychology or sociology. Yet, dig into any part of economics and you’ll find value assumptions wrapped in a veneer of circular, self-affirming equations. A free market doesn’t exist, but the more we pretend it does, the more we measure positive economic well-being (you know, like increases in national GDP). That’s silly.

Czech economist Tomas Sedlacek, whom I’ve written about before, criticizes his profession’s tendency toward circular self-affirmation. He uses an analogy of two physicists who, for the sake of easier calculations, assume that the friction of air doesn’t exist. They then go out for a drink with their colleagues and reveal that, through their beautiful mathematical calculations, they discovered that air creates no friction. In the morning it was a technical assumption for the sake of lab work, but the beauty of the math convinced them by evening that their assumptions were correct.

In reality, physicists obsess over observations that contradict their theories. Economists too often dismiss them. Yet, because economics is not a hard science—economists don’t launch rockets and then have to wrestle with why they come crashing back down to earth when air friction isn’t considered—embedded values are not easily called into question.

We have a free market. Humans are rational. Humans seek maximum utility. There is no friction of air. These are all false assumptions adopted merely for technical ease of calculation. Physicists are forced to reconcile with a reality that doesn’t match their assumptions. Economists bear no such burden.

Here’s the reality: There is no such thing as a free market. In any definition, that’s the lead. We can talk about voluntary exchange and the level of coercion, but that is a discussion about tradeoffs and degrees, not the existence of these market-shaping forces.

A true free market urbanist, one that believes in the power of markets to provide beneficial outcomes in the way human settlements are developed, must struggle with the nature and composition of markets. That’s a purposeful discussion of values and desired outcomes.

The Fragile Restaurant versus the Strong Restaurant Ecosystem

In Chapter 4 of Antifragile, Nassim Taleb explores the tradeoffs of complex systems. The title of the chapter—What Kills Me Makes Others Stronger—provides the sharp edge of the insight. Within every complex system, within every market system, strength in one layer is provided by the fragility of some underlying layer. Sacrifice in one place is beneficial, even necessary, for the success of the system as a whole.

Taleb uses the example of restaurants. From Antifragile:

Restaurants are fragile; they compete with each other, but the collective of local restaurants is antifragile for that very reason. Had restaurants been individually robust, hence immortal, the overall business would be either stagnant or weak, and would deliver nothing better than cafeteria food—and I mean Soviet-style cafeteria food. Further, it would be marred with systematic shortages, with, once in a while, a complete crisis and government bailout. All that quality, stability, and reliability [of the collective of local restaurants] are owed to the fragility of the individual restaurants.

He elaborates later in the chapter on the relationship between the fragile individual restaurant and the strong collective of restaurants:

….the restaurant business is wonderfully efficient precisely because restaurants, being vulnerable, go bankrupt every minute, and entrepreneurs ignore such a possibility, as they think that they will beat the odds. In other words, some class of rash, even suicidal, risk taking is healthy for the economy—under the condition that not all people take the same risks and that these risks remain small and localized.

Go to any city in North America and you’ll find a place to eat. The amazing robustness of the restaurant industry—the availability as well as the variety and selection—is a direct result of our willingness to let individual restaurants fail. The entrepreneurial culture of local restauranteurs provides a steady stream of crazy risk-takers willing to try their luck, and we all benefit from this steady stream of low-level experimentation.

In Chapter 5, Taleb transfers this restaurant insight to the difference between city-states and nation-states, specifically when it comes to systematic failure. I’ve edited his work here to a degree to make it more readable:

Let us take a look at Europe before the creation of nation-states of Germany and Italy. There was, until the creation of these romantic entities, a fissiparous and amorphous mass of small statelings and city-states in constant tension, but with shifting alliances. And here is something comforting about statelings at war: mediocrity can not handle more than one enemy, so war here turns into an alliance there. Tension was always present somewhere, but without large consequences.

The creation of the nation-state in the late nineteenth century led to what we saw with the two world wars and their sequels: more than sixty million victims. The difference between war and no war became huge, with marked discontinuity. Some people have fallen for the naive belief that the world is getting safer and safer, and of course they naively attribute it to the state. It is exactly like saying that nuclear bombs are safer because they explode less often.

A collection of statelings or city-states is similar to the restaurant businesses we discussed earlier: volatile, but you never have a generalized restaurant crisis.

Like the restaurant business, a collection of city-states creates a lot of ongoing, localized stress and tension, but that makes the overall ecosystem stable and greatly diminishes the likelihood of catastrophic failure. Conversely, centralization into nation-states is seductive in that it can reduce the routine stress and tension experienced by real people, but only at the expense of making the overall system more fragile and increasingly prone to failure, including global wars from which it is impossible to escape.

Voluntary exchange is one part of a market. Some mechanism of controlling intervention, and the types of systematic coercion inherent with market rules and incentives, are tradeoffs to the establishment of any market. So, it’s not enough to merely be for voluntary exchange. Any person claiming to be an advocate for markets must examine the degree of intervention, the types of systematic coercion that intervention creates, and then struggle with the question: At what layer do we accept fragility?

What part of the market must be strong and what part of the market are we willing to make fragile so that strength of critical components is achieved and sustained? Without that answer, without struggling with the implications of that tradeoff, advocacy for markets is merely an ideological exercise in dogma and confirmation bias.

What do we make strong? What do we allow to be fragile?

It is very clear to me that, since the economic failures surrounding the Great Depression and the boom that corresponded with auto-oriented suburbanization following World War II, economic policy in the United States has been based on the idea that the nation must be strong. The two world wars thrust the United States into a global leadership position, both politically and economically. During the first generation of suburbanization, we were fighting the Cold War, and a couple of related hot wars. The advent of atomic weapons, and the corresponding need to empower someone with the authority to make rapid response decisions involving their use, conveyed disproportionate power to our nation’s top executive.

These and other factors, not the least of which were astounding advancements in communications, from radio and television to satellites and ultimately the Internet, made it very natural for us to collectively agree that it’s a small world. And in this small world, it was the nation—the United States of America—that absolutely needed to be strong, not the states and certainly not the cities and towns.

We report on GDP and unemployment at the national level. As long as GDP is above 3% annually, we don’t get too uptight if five or ten states are tragically under-performing. If national unemployment goes below 5%, that’s all good, even if some geographies are struggling with rates much greater. With our current approach, we’re willing to sacrifice the financial health of, say, Illinois or California, Akron or Peoria—we’re willing to tolerate their ultimate failure, default, and the resulting hardship—because, like the failed restaurants making the restaurant ecosystem stronger, the potential of their failure is the price paid for national strength.

The marketplace we have evolved over the past century places the needs and priorities of the centralized nation first. The political left in this country has done this by elevating centralized government and insisting on the primacy of federal institutions. The political right has done this by elevating centralized corporations and insisting on the primacy of centralized financial markets. Both complain about banks and Wall Street, but both demand low interest rates and easy credit while supporting deficit spending when in power. In a crisis, they will both agree to sacrifice whatever needs to be offered to bail out the major players on which we are all now dependent.

While I understand how we got here, I think this result is backward. From my book, Strong Towns: A Bottom-Up Revolution to Rebuild American Prosperity:

As an unprovable article of faith, I believe that a financially strong national economy is the byproduct of having financially strong cities, towns, and neighborhoods. I do not believe the opposite: that our cities will be financially strong and healthy if we can only create a strong national economy.

In short, I believe that economic strength is built from the bottom and works its way up, like a foundation supporting a structure. I do not believe that a focus on success at the national level will result in enduring, fine-grained prosperity in our local communities.

Historically, humans have been willing to have individual restaurants fail in order to have overall stability in the ecosystem of restaurants. The individual restaurants are each fragile while the overall ecosystem of restaurants is strong.

Americans today—especially the policymakers and influencers that have come to be known as “the elite”—are willing to see individual cities and states fail in order to have overall stability in the nation. Cities and states are fragile while the nation is strong. The markets we have established reflect this underlying value system.

A Strong Towns approach is fundamentally different, although I will freely acknowledge that—as with any approach—it’s not without tradeoffs. We are willing to see individual blocks and neighborhoods fail in order to have overall stability in the city. We place the strength and stability of the city at the peak of our value system. In our view, neighborhoods and blocks are fragile while cities must be strong. The markets and approaches we advocate for are far more localized than currently experienced, a reflection of our set of values.

When self-proclaimed “market urbanists” say to just build more condo towers as quickly as possible, until the sheer volume of them crashes the housing market and supply meets demand at a much lower price point, they are making an argument from a value set consistent with a nation-first marketplace. When they argue that ratings agencies and bond markets accurately reflect the risk level of local governments, their assessment of risk is viewed through a nation-centric prism, ignoring what failure actually means at the local level. When they use a nation-centric argument to suggest that big box stores, franchise restaurants, and assembly-line suburban housing are all good for the economy, they ignore the lack of adaptability, legacy infrastructure costs, and damage to local economic ecosystems all of those approaches create within cities.

I believe in markets and I believe in urbanism. I do not think it is coherent to advocate for, or even nominally accept, a marketplace that is nation-centric, one that is willing to sacrifice cities in pursuit of national strength and stability, while also claiming to support an urbanism agenda. Such a view is either ideologically dogmatic about what constitutes a market, or it is treating urbanism as merely a fetish, not an operating system for broad human prosperity. Either way, I don’t respect it.

And with that seven part preamble, I’m now prepared to answer a series of questions put to me by a critic. I’ll start that in the next post of this series.

Top image from Wikimedia.