Toward an Economics of Sustainable Urbanization

Cliff Cobb
A city is constituted by the interactions of people. The physical structures of a city guide those interactions, but the structures themselves are not the city. People and their relationships are the elements that define a city.
The study of economics is a study of one aspect of those relationships. Rather than thinking about economics in terms of money or material goods, it should be understood as the study of how people balance competing values through exchange. An economic system works if it allows people to realize value through exchange.
Marxist thought tends to define the production of value exclusively in material terms. Starting with a labor theory of value and a deep concern for the forces of material production, Marxism equates value in terms of the physical output created by labor. Exchange and other services add no value. This reflects a bias shared by Adam Smith, who denigrated the value of services when analyzing the wealth of a society.   But if the analysis of value realized in exchange starts and ends with phyisical production, much of the value created by cities will be ignored. A materialist analysis of urban life also creates confusion when seeking to define appropriate policies, both economic and environmental policies. I certainly do not mean to dismiss Marxist analysis altogether. One of the enduring lessons that Marx taught was that we should analyze whose values are being realized through exchange. Nevertheless, a purely materialist analysis leaves out much that is important.
Overcoming the materialist bias of Marx allows us to think more clearly about the types of values that are exchanged and realized within a city.   It would appear from archaeological records that cities originated not only as centers of material exchange but equally as centers of religious expression.   Many modern people imagine that religion is nothing more than superstition and that we have outgrown it. Yet, an important feature of every religion is that it reminds people that they are part of a larger whole. From ancient times until today, there is a need for people to see their actions as fitting into some pattern that goes beyond individual life. Religious experience broadens human horizons to recognize that our personal experiences are part of the totality represented by society and by nature.
Thus, symbolic exchange, including religion, is as much a part of the economy of cities as material exchange. One of the great strengths of cities, from the ancient world until today, is their tendency toward cosmopolitanism. People from many different cultures and ethnicities come together in cities. Although the exchanges that cross those lines of difference can cause friction, in the long history of humanity, it is the urban experience of friendly exchange among cultures that offers us the possibility today of peaceful and harmonious exchange among nations.   This non-material outcome of city life is one of its great products.
Thinking about the role of cities as centers of exchange in this broad sense is a way of introducing the concept of value. The values realized by exchange extend far beyond the realm of simple material needs.   The economy of a city is a representation of the spiritual life of a culture or society. The sustainability of cities depends on maintaining their capacity to serve as complex centers of exchange, not merely for physical goods, but for ideas and culture as well. A materialist conception of urban life leads to consequences that undermine both exchange and sustainability.[1]
From Materialism to Mercantilism
The fundamental problem of materialism as the basis of economic thought is that it corrupts both market exchange and the public provision of services.   By trying to manage the physical form of a city and the location of various types of activity, public officials unwittingly create the conditions for the spiritual demise of urban life. They encourage a view of rewards that is entirely materialistic and divert attention away from efforts to improve the overall quality of life.
The economic and political processes that emerge from a materialist conception of cities might best be labeled "mercantilism."   The objective of mercantilism has always been the single-minded pursuit of material wealth, most of which is received by the most powerful individuals. By contrast, the aim of socialism and economic liberalism (market exchange) is to maximize the realization of a variety of values by all members of society. But both socialist and capitalist systems tend to decay towards mercantilism unless automatic safeguards are created to prevent the concentration of power in the hands of a few. Mercantilisim represents the lowest common denominator for all modern economies, the point towards which they tend if nothing is done actively to prevent it. In a mercantilist system, exchange is choked off and replaced by political and economic domination.
One feature of mercantilism that can be observed in many countries today is government favoritism for large enterprises over small ones. The public rationale for supporting giant projects is that they are presumed to yield economies of scale, although without excellent management, they are likely to perform more poorly than small enterprises with an equivalent amount of capital. Yet, if government promotes visible projects such as factories, railroads, power plants, and the like, officials can take public credit for their efforts, even if the enterprises created with government support are inefficient. By contrast, no one has a photograph in the newspaper for designing a program that benefits millions of small businesses. Above all, however, it is much easier to hide various forms of political payoffs in the budget of a large enterprise. Thus, government officials in the U.S., Nigeria, Brazil, and China (and everywhere else) favor big inefficient projects that produce slush funds to benefit the political insiders.
Another defining feature of a mercantilist economy is that the energetic members of a mercantilist society do not strive to be productive. Instead, they devote their resources to gaining and maintaining the favor of those with the power to grant privileges. Success in such a system does not come from increasing efficiency, developing cooperative enterprises, or inventing new technologies. It comes instead from making political connections to extend one‘s privileges.
There are two distinct types of privilege that operate as rewards in a mercantilist society. One type is the prestige of office and other is the opportunity to accumulate economic power. In early modern Europe (from around 1550 to 1800), government offices were often sold to the highest bidder. In some cases, office-holders merely had prestige. Other offices provided not only prestige but also the opportunity to make a large fortune from bribes, extortion, and other forms of self-seeking behavior. The open and direct sale of offices eventually ended, but the idea of gaining both political and economic power through the accumulation of privilege certainly remained.
The United States operates under an increasingly mercantilist economic system. Massive land grants in the 18th century were followed by land and monopoly powers granted to railroads and other large enterprises in the 19th century. By the close of the 20th century, government-assisted concentration of real estate continued, but by then it was supplemented by the wholesale transfer of economic power through the creation of monopolies related to intellectual property. Throughout its history, it has always been possible to accumulate a modest fortune through hard work and invention, but the wealthiest 1% of families, which control about 40% of the wealth, gained that position largely through privilege.
Since 1975, China has moved rapidly in the direction of becoming a mercantilist society like the United States, both in terms of inequality and the causes of it.   In both countries, privilege is more important than productivity in explaining how the economic advancement of individuals occurs.
The crucial form of privilege in any modern economy is positional advantage. On a chessboard, positional advantage consists of controlling the center squares. In cities, where most wealth is generated, positional advantage consists of controlling the best real estate--either in the center of the city or along transportation corridors. The ability to influence who gains positional advantage within a city remains one of the greatest forms of political power.
The Economy of Chinese Cities Today
The Chinese economy is no longer being guided by purely Marxist principles. The new system, initiated by Deng Xiao-Ping almost thirty years ago, has been called market socialism.   It draws on two strands of ideology. The socialist strand posits that state should guide and manage development on behalf of the people. The market-based strand is based on the idea that exchange will be most productive if each individual is rewarded for work or risk-taking.
In practice, however, the Chinese government has chosen an economic model that is largely mercantilist. The government thus tends to favor projects and policies that add to material output and individual wealth, even if those activities destroy other values that would be produced through private or social exchange. For example, the government encourages the production of private automobiles even though Chinese cities cannot accommodate them and even though they add to the already heavy burden of air pollution and energy consumption.   In supporting the auto industry, the government is thinking solely of material production, not of the net increase in value for society as a whole.
Other evidence that China has adopted a mercantilist approach is the abuse of authority by local officials who force both peasants and urban households from their land so it can be used for a more productive purpose. This behavior has been justified by a materialist philosopy that values commercial development. The government substitutes one set of values for those being realized through processes of daily exchange. In the process, government officials also favor friends and relatives who gain control of valuable real estate.
Another factor that has contributed to the development of a mercantilist orientation in China is a tax system that previously encouraged local officials to favor enterprises that could serve as a source of tax revenue. Those enterprises often required subsidies to sustain them, but due to the structure of the tax system, it benefited local officials and managers to operate inefficient and wasteful enterprises. The greatest abuses of the tax code were reduced by the national tax reform of 1994, but the problem has not disappeared entirely.
The simple fact that one must have permission to live in a city in China is evidence of a mercantilist orientation. It reveals the fact that city dwellers have privileges that are sought by peasants. In early modern Europe, the members of urban guilds made forays into the countryside to destroy the workshops on which products were made in competition with the products of the guild. Of course, nothing like that happens in China, but equally unfair practices have given city dwellers unfair advantages. For example, high tax rates on peasants have been used to confiscate rural wealth in order to keep tax rates low in the cities, and the government for many decades forced farmers to subsidize urban residents by selling grain at a price below the market level.
In general, another clear indicator that a government is following a mercantilist policy is the degree of economic inequality. In a mercantilist system, privileges are bestowed on well-connected individuals and businesses that allow them to reap rewards beyond their contribution to society. A large portion of the economic inequality that arises in modern society stems from the privileges. Thus, the dramatic rise in the Gini coefficient of income in equality in the last thirty years, from around 30 to around 40, is an indirect indicator of the shift to a mercantilist system.
I realize that the Chinese government is not single-minded in pursuit of production. It is also concerned about the issues I have raised-- traffic, air pollution, and energy use caused by automobiles, the unjust seizure of land, an irrational tax system, the excessive taxation of peasants, and economic inequality--but the government has addressed thse issues in isolation from the underlying causes. It addresses the symptoms of mercantilism, but it has made no effort to rectify the system that gives rise to these problems.
There are two reasons for the lack of systematic action by the central government. One is the absence of an intellectual framework that would enable government officials to recognize the underlying unity of the many problems they face. As long as the central government promotes a narrowly-defined conception of economic development, it will undermine its chances of creating an economy based on exchange rather than privilege. Second, the central government may not have the power at present to implement the reforms that would be necessary to reverse the present course. The reason for that is simple. Local governments are able to intercept a large portion of tax revenues before they reach the central government. Thus, the national government has little leverage for achieving reforms. At the same time, local officials have little reason to favor reforms, since they are among the primary beneficiaries of mercantilism, at least in the short run.
Restoring Opportunity in Urban Economies
I have briefly tried to indicate that a mercantilist philosophy of economic development creates a range of negative consequences. In my view, those consequences have been blamed unfairly on capitalism and socialism. In Western societies, pollution, inequality, and other ills have been blamed on corporate power, but that concentration of power is another symptom of mercantilism, not the cause. If corporations were truly the cause of these problems, then China should be relatively free of them, since corporations still play a relatively small part in the Chinese economy.
The first step in overcoming mercantilism lies in developing an understanding of economics that does not treat production as the sole value. Humans experience value through many types of social interaction and through interaction with nature. Renewing a conception of economics to encompass all values realized in exchange is an essential part of any reform.
The second step involves a thorough analysis of the way in which mercantilism operates as the subliminal ideology of almost every economy in the world today. Until the role of mercantilism has become an accepted way of analyzing social problems, galvanizing support for systemic change will be impossible.
The third step involves developing an alternative philosophy of exchange and value that explains how an economy can be managed without the creation of unjust privilege. Marx‘s writings can provide only minimal guidance, since his belief in economies of scale led him to endorse large-scale enterprises without reservation or limitation.   The philosophy of Henry George represents a better approach to the problems posed by mercantilist tendencies in modern economies. One motive behind the attachment to mercantilist policies is the common view that an economic system must choose between efficiency and equity. One of central feature of George‘s philosophy is the reconciliation of those competing principles in a manner that avoids many of the mercantilist problems associated with socialism and capitalism.
The practical conclusion that Henry George developed was based on the idea that the surplus value generated by an entire society is primarily to be found in the value of urban land. Because cities are centers of trade, locating a business in the center of a city is of great economic advantage. Being allowed to locate there without offering a reciprocal payment to society is the primary form of privilege that constitutes the basis of mercantilism. Those who are granted the best locations become rich; those without advantageous locations must work harder merely to avoid poverty. To balance the initial power position of everyone in society, Henry George proposed a tax on land values high enough to remove the economic privilege associated with urban location. As it turns out, taxing that value has no retarding effect on economic activity.
There are dozens of implications of taxing land values. I will mention just one. China currently faces an ongoing migration from rural areas into cities. Why? There are economic advantages associated with living in cities. Since city residents are not required to pay for that privilege, it creates an imbalance between the city and countryside, drawing in more people than the city can sustain. A tax on urban land values that was distributed evenly throughout the entire population of China would correct that imbalance and reduce the flow of migration into cities. At the same time, the tax would encourage more intensive use of urban land, and thereby increase employment opportunities within cities.
Conclusion
To summarize briefly, I have suggested that a materialist, production-oriented approach to economics is closely associated with a pernicious system of economic management called "mercantilism." No one in the modern world defends mercantilism as such, but most nations of the world continue to operate to a great extent on the basis of mercantilist principles.
Local, urban economies are even more prone to mercantilist tendencies than national economies. The evidence of those tendencies can be found in favoritism and subsidies, which are received by businesses from local government officials and justified in the name of economic planning or local economic development programs. The most important form of favoritism is the transfer of rights to the best locations for commerce. Much of what is called corruption is simply the mercantilist triumph of political connections over economic exchange.
A complete transition from a mercantilist system to one in which exchange occurs freely can only happen through a transformation of the philosophy that underpins social and economic analysis. I have suggested that the philosophy of Henry George provides a good starting point for that reformulation of fundamental principles. But it is just a starting point. He leaves many questions unanswered. While a new philosophy is being developed, however, he provides a simple, yet elegant, means of overcoming many of the problems of mercantilism--a tax on the special privilege of owning urban land.   Although that policy will not by itself bring about sustainable cities, it can make a significant contribution to that goal.
[1] Much of what I have to say will not appear to bear directly on cities. There are several reasons for that. First, exchange has historically occurred primarily in cities. Thus, any analysis of an exchange economy is necessarily about the economy of cities.  Second, cities have always drawn upon both labor and resources from neighboring rural areas. The economy of cities has never been limited to the boundaries of the city. In the modern world, urban economics is national and international. Third, problems that arise in cities are largely based on our way of thinking. Clearly the ideas that shape a society‘s response to urban problems transcend the boundaries of the city. To deal with urban economies, it is necessary to think about fundamental principles that apply more generally to an entire society.