On the smallest feasible political unit [fluff piece]

The main idea: the impact on externalities on driving up the optimal size of property / political units. 

0. Posts on this blog are ranked in decreasing order of likeability to myself. This entry was originally posted on 27.07.2022, and the current version may have been updated several times from its original form.

0.1 This post is a fluff piece, containing analysis and commentary but no proposed solution to some issue. I try to keep this sort of stuff to a minimum as commentary for commentary’s sake is not the point of this blog. 

1 Is it the individual? In defence of zoning, or why you can’t own a piece of a city

1.1 The bane of private property owners are externalities, stuff you do where you only reap some of the benefit or bear some of the cost. Look it up. A reliable way to eliminate externalities is to internalise them, i.e. have the same owner own all bits of property affected by each-other’s externalities, at which point the owner is able to rationally calculate the truly efficient use of the portfolio. Against this must be weighted the costs of actually controlling and optimising larger and larger portfolios, to the point where the socialist calculation problem emerges.

1.2 Thus, even though every action causes some externality, this neither means that communism is the rational alternative not does it allow us to throw the whole concept into the dustbin, as Rothbard attempted to do. At some point, internalising further externalities over your existing portfolio is disrupting enough to put a stop to the process.

1.3 And if there’s one setting in which externalities reign supreme, that would be the city, where the value of one’s property is only to a limited degree impacted by the characteristics of the property itself, and is majorly impacted by the externalities (positive and negative) of all adjacent properties. Georgism was all about that obvious point but looked at land itself as being special, instead of focusing on all property in a dense enough setting. Indeed, I don’t think I’ve ever heard even anarcho-capitalists such as my former self argue against zoning in any way that didn’t end with “and a guy would own the city in a free society”.

1.4 In brief, there’s a huge chasm between the total value of a city owned by a million individual property-holders and a city owned by a single entity. The profit-seeking move is for owners to acquire ever more adjacent properties, although the process can be lumpy (owning two apartments instead of one does little, owning the whole apartment tower is the least profitable move) and is historically violence- and not market-driven.

1.5 To ground this a bit, negative urban externalities may be things like causing noise or noxious odours, whilst positive examples include access to a park. Properties that avoid the first two and can access the latter go for a huge premium, but absent established zoning areas, have no control over any of those things.

1.6 But what about voluntary zoning, i.e. established by means of covenants or other such legal tools? Anyone who would establish such covenants over some piece of land (“no noise after 8 PM” or “I can fly over you and you have to take it”) must first buy that piece of land, and the act of establishing limitations of any kind will of course lower the land’s value. In and of itself, this is loss-making operation. Of course, a well-thought covenant causes the value of adjacent properties to rise a bit, but you have to own those as well to pocket this.

1.7 At which point you own enough properties to be able to make a profit out establishing well thought-out covenants? Yep, you have to own the whole city, or at least a few blocks. And you have established zoning.

1.8 Start where you will, you end up seeing that dense enough agglomerations of people are most profitably owned by a single entity. 

2 Is it the city? On shredding gasoline.

2.1 One does not have to read much reactionary thought to encounter the concept of cities as IQ-shredders. Cities obviously do shred IQ, and the richest cities do so at a global scale. Singapore may be the only country to ever set a high enough bar for immigrants that their average IQ has been kept where it originally was, at about 105 points. All those smart and driven people are drawn to Singapore to make some dough and fail to reproduce whilst the midwits who are denied a visa go on to have 2.1 kids. IQ shredded.

2.2 Such a model is obviously true, and obviously half-assed as well. It’d be like a model admonishing internal combustion engines as “gasoline shredders”. Well yes, if you run the engine on a bench it is, but you forget that the engine shreds gas for a purpose: create motion.

2.3 Just as much, cities consume IQ as the fuel they need to produce such economic and technological power to allow all (not just city-dwellers) to maintain a certain standard of life. If those living in the densest, most successful cities reproduced at least at parity, cities would consume nothing and be perpetual motion machines. No such thing.

2.4 But the “IQ shredder” model is not to be tossed on account of its incompleteness, but rather to be used to drive home a key point: the key resource cities need is sourced from beyond their limits, and needs to be renewed continuously, just like you need to replant saplings after you cut down a tree unless you plan to find yourself without timber in a few years.

2.5 In other words, cities need suburbs, rural areas or other hinterlands where people are happy to reproduce. The cycle whereby people leave such hinterlands for the city and return to retire is natural, but not sustainable unless some of siblings either never leave or return much earlier than that. Anyway, any city without access to such an IQ hinterland is running on borrowed time and shall fall (or be made to fall by those whose IQ they steal).

2.6 Now I’d like to throw some shade at those who are keen to compare the tax revenue and costs linked to suburbs and declare a deficit: presto, upzone everything. And fail to renew IQ and, eventually, population.

2.7 To recap, the situation where the movement of people into cities is uncoordinated eventually shreds IQ in a non-renewable fashion. Some direction is needed, which direction would be easier to provide by a single optimising owner.

3 Is it the Greater City? “We don’t tell the Arabs what to do with their oil, and we expect them not to tell us what to do with our water”

3.1 We can ride the externalities bandwagon a bit further. You have a trafficked trade route - say a major river - over which five or six Greater Cities as defined above are found. Each taxes trade as it flows through its territory, and by the time the boat gets to the head of navigation it’s been taxed far in excess of the revenue-optimising point across the whole river. Once again, the value of the river as a trading route is far inferior when split across non-coordinating owners than it’d be if owned by a coherent will.

3.2 Or a non-navigable river’s upstream bit is owned by one King, and the downstream by another. The former builds a dam for power, irrigation and flood control. Which causes such issues downstream that the value of the entire flow is suboptimal compared to what it’d be when owned by a single optimisator.

3.3 Or two or more Greater Cities sit atop the same oil reservoir. Or a Greater City downwind from another’s industrial area. I can keep going.

3.4 Well, would we now have to admit that the world should optimally be allocated to as many owners / sovereigns as there are individual rivers or interconnected natural resources basins?

4 Taking stock

4.1 We used externalities to go from the individual owner to a city-state, to a greater city, to a fluvial state. But we also agreed that at some point the gains you make when expanding your portfolio to internalise further externalities are not worth it compared to how inefficiently you can optimise a growing portfolio anyway. So, where to draw the line?

4.2 I have no idea, but history seems to come up again and again with fluvial states that optimise long trade routes. Maybe the ride really goes all the way, but the historical record is reflective of more than just profit optimisation, as per point 4.7 below.

4.3 Or perhaps some smart contract design can alleviate or do away with most of the coordination issues inherent is some of those steps. I know of no such way to make the individuals owners of the same route act in unison to maximise its value, but I suppose it’s not impossible for someone to come up with some way. This would put us back to the Greater City as the least feasible political unit.

4.4 Coming up with some way to efficiently remunerate rural or suburban areas for the IQ they ship into cities would be far harder (this ain’t it). I don’t think there’s much of a chance of some smart enough contract being able to deal with the need for a City to own its hinterland to optimally produce IQ. But that’d be quite welcome if someone could manage it, as cities and rural areas need far different governance models, and both suffer when made to live under one ruler.

4.5 But hardest of all would be coming up with some design that would allow a city to be owned by a million individual owners and yet create an aggregate value comparable to what even a very corrupt and incoherent single owner would manage. Again, not impossible, but a staggeringly complex issue.

4.6 All in all, I think externalities do drive minimum feasible political units all the way to the low hundreds with today’s contracting knowledge, but at some point someone will think of a way to allow coordination across trade routes and other resource pools that doesn’t rely on a single sovereign, pushing the number of viable units into the high hundreds.

4.7 Now, all of this only takes into account the economically-optimal area of ownership, but actual states are impacted at least by defence and nationhood considerations as well.  On the former point one can be hopeful that technology will come to the rescue. As to the people, World War II showed that if you move people to fit borders you’ll be far more successful than if you try to move borders to suit people.

4.8 Another issue to take into account is that there’s precious little point in striving for the greatest optimisation per unit of land if the owner itself is incoherent, like all modern states are. This is a separate - and also very hard issue - but goes beyond the scope of this bit here.