Isegoria

The Honduran government intends to approve two small special development zones, leading The Economist to quip, Honduras shrugged:

And two libertarian-leaning start-ups have already signed a preliminary memorandum of understanding with the Honduran government to develop them.

One firm goes by the name of Future Cities Development Corporation. It was co-founded by Patri Friedman, a grandson of Milton Friedman, a Nobel laureate in economics, and until recently executive director of the Seasteading Institute, a group producing research on how to build ocean-based communes. The other is called Grupo Ciudades Libres (Free Cities Group) and is the brainchild of Michael Strong and Kevin Lyons, two entrepreneurs and libertarian activists.

Both share a purpose: to build “free cities”. Last April all three spoke at a conference organised by Universidad Francisco Marroquín, a libertarian outfit in Guatemala. In September they and Giancarlo Ibárgüen, the university’s president, launched the Free Cities Institute, a think-tank, to foster the cause.

The Economist dwells on past failures to create a new libertarian quasi-state, like Werner Stiefel’s Operation Atlantis, which Spencer Heath MacCallum describes in rather neo-cameralist terms:

His constitution for a free community was a radical departure from all political constitutions.

The need for such a construct arose because Werner was treating his “Galt’s Gulch” as far more than a literary device. He had set about to apply it in the real world. Unlike Ayn Rand, therefore, he could not ignore the question of how it would be administered. There seemed no easy answer. By 1972, he had reached a low point and almost despaired of the project, agonizing over the question of how Atlantis could be administered as a community and yet its inhabitants remain free. What form of government should he choose? Surveying all of history, he found no form of government that would not be prone to repeating the same tired round of tyranny the world had known for thousands of years.

At that point, he came upon the ideas of my grandfather, Spencer Heath, and saw their relevance. Heath had pointed out an advantage in keeping the title to the land component of a real-estate development intact and parceling the land into its various lots by land-leasing rather than subdividing. This creates a concentrated entrepreneurial interest in the success of the development, enabling it to be administered as a long-term investment property for income rather than selling it off piecemeal for a one-time capital gain. Those holding the ground title have an incentive to supply public services and amenities to the place, creating an environment the market will find attractive. To the extent they do so, they can recover not only their costs but earn a profit to themselves and their investors. Heath forecast that in time whole communities would be managed on this nonpolitical basis. He saw this becoming the future norm for human settlements, each competing in the market for its clientele. Community services, he thought, would thus become a major new growth industry.

Heath’s ideas brought into focus a vast and virtually untapped body of empirical data from the field of commercial real estate, namely, the emergence of multi-tenant income properties such as shopping centers, hotels, office buildings, business parks, marinas, and combinations of these and other forms. What all of these have in common is that title to the land underlying a development is not fractionated by subdividing but is held intact. While buildings and other improvements on the land might be separately owned or not, the sites are leased. This preserves the concentrated entrepreneurial interest in the whole development that enabled it to be planned and built initially, and this concentration of interest permits it to be operated as a long-term investment for income. The result is very different from a subdivision, such as a condominium or other common-interest development, which is likely to be governed by a homeowners’ association. A subdivision is an aggregation of consumers looking to their own purposes and not in any sense a business enterprise serving customers in the competitive market.

Spencer Heath spelled out his concept in 1946, in Citadel, Market and Altar. Murray Rothbard summarized it for a libertarian audience in 1970:

The Heathian goal is to have cities and large land areas owned by single private corporations, which would own and rent out the land and housing over the area, and provide all conceivable “public services”: police, fire, roads, courts, etc., out of the voluntarily-paid rent. Heathianism is Henry Georgism stood on its head; like George, Heath and MacCallum would provide for all public services out of rent; but unlike George, the rent would be collected, and the land owned, by private corporate landlords rather than by the government, and the payment therefore voluntary rather than coercive. The Heathian ‘proprietary community’ is, of course, in stark contrast to the scruffy egalitarian commune dreamed of by anarchists of the Left.

Thus, individual homes would not be freeholds but leaseholds, like the spaces in a shopping mall. Neither option’s quite ideal though.

Our ideal division of property rights would align incentives so that a tenant living in a house would gain a dollar by (wisely) investing a dollar (or a dollar’s effort) in the house and would lose a dollar by neglecting maintenance by a dollar (or a dollar’s effort), and the management company running the larger neighborhood or city would similarly gain or lose depending on how well it provides “public” services.

I suggest that we could achieve this by having the city sell semi-freeholds encumbered by a flexible tax-like rent, paid to the city — but this quasi-property tax wouldn’t be based on an individual plot’s value (with improvements). Rather, it would be based on the individual plot’s acreage (area) and the average price per acre of the surrounding land.

Thus, rents would go up as property values go up, but no one property-owner would face the disincentive that comes with ordinary property taxes — doubling his own property’s value through improvements wouldn’t double his property taxes; it would only increase his property taxes infinitesimally.

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