Thursday 13 December 2012

Town planning: Infrastructure

NB 1: What I write here may seem blindingly obvious, but sometimes is worth restating what everybody already knows and takes for granted and looking at it from an ever so slightly different angle.

To cut a long story short, roads aren't there to join up the buildings; buildings are there to make use of the opportunities which roads offer.

NB 2: I have used "roads" as a proxy for "infrastructure", because they are the oldest and most basic kind of infrastructure. Everything else, mains water, sewerage, mains gas, electricity, telephone lines and broadband, follows the roads, both in a chronological and literal sense. And 'public services' like policing, fire brigade, refuse collection also need "roads" to get access to your house (and you need your telephone to get in touch with them - mobile phones are a special case which I won't cover further).
Let us assume that town planning is carried out by an economically rational, reasonably benevolent monarch (the idealised state), and that he has to do town planning for an area of 100 units, where each unit is big enough for a house and garden. (It could just as well be a campsite owner dividing up his site into plots big enough for one tent/one caravan who wants to maximise his rental income, but enough with the analogies).

Option a) is to simply divide up the area into 100 plots with no roads between them. Clearly, the monarch would be able to sell off or rent out the outside ring of plots, but if you live in the next layer in, you won't be willing to pay much to live there, because every time you want to get out you will need to agree with one of your neighbours that you can cross his plot. Those three or four rows inwards will be nigh worthless:

Option b) is the default option. The monarch dedicates 36 units to roads and ends up with 48 plots and 16 spare plots, which could either serve as little communal parks for the surrounding 12 plots, or end up as larger back gardens:

Would the total value of these 48 plots, all with access to "roads" (and sewerage etc and whatever they invent next after broadband) be higher than the total value of the 100 plots in option a)?

Yes of course. Or else towns and cities wouldn't be laid out like this.

Now, does the monarch need to somehow pay for the roads out of the goodness of his own heart and/or do they reduce the income he can generate from those 48 plots to less than what he could get from the 100 plots in option (a)?

No of course not.

He knows that he can charge fuel duty which will cover the cost of road maintenance three times over; that he can allow privatised utilities to pay for the pipes and cables and that they will make their money back and more by charging you for water, gas, electricity etc.

With option a), how much would residents of the inner plots be willing to pay for police, refuse collection, fire brigade? Not much, because those services won't be able to reach the inner plots without having lengthy and expensive negotiations with the residents of all the outer plots first.

With option b), residents will be quite happy to pay for a share of these services, as these things are per-capita-cheaper the more people share the cost and the more easily accessible your house is. The benefit of these things vastly outweighs the cost of providing them, so that boosts the rental value of the plots even further.
Q: But ultimately, what are people on the plots in option (b) really paying for?

A: They are paying for access to other people. A resident in (a) can only freely contact 8 other residents. A resident in (b) can freely contact all the other residents, and as the town expands, he has access to more and more people; this enable specialisation, for work or for hobby purposes and so on.

The roads, telephone lines and broadband are not really an end in themselves (even though they generate profits for the people who build and operate them). They only have a point if you can drive somewhere, ring somebody up or look something up that somebody else has put up on the internet.

The utility companies make money by providing you with stuff far more cheaply or conveniently than you could provide for yourself; part of the cost is the length of the pipes and cables, so the closer together people live, the lower the per capita cost of having them.

Much the same goes for police, fire brigade and refuse collection, even if people are paying towards the cost. They enable more people to live together more safely, securely and hygienically, thus still making a net overall profit after the costs have been paid. And the closer together people live, provided they have access to more people as a result (in a literal or figurative sense), the cheaper the utilities, the more people can specialise, the more they can find like-minded with whom to socialise, the more people they can exchange goods and services with and thus the more wealth is created.

- the notion that roads and utilities are a cost to the people who provide them is a nonsense; given sensible town planning, people can make a profit by providing them. So there's a producer surplus, and clearly there is a consumer surplus too (people are prepared to pay more for a house which has good transport links, mains water, broadband, whatever whizz bang invetion comes along in a few decades that we haven't even dreamed of yet, etc).

- ultimately, the only real driver of the values of the plots are simply the people who live there. Having more potential customers = producer surplus, having more potential suppliers = consumer surplus. The road and utility owners/providers need paying customers far more than people need utilities (compare and contrast Humber Bridge with Channel Tunnel).

- quite what role the original "landowner" plays in all this wealth creation (the producer and consumer surpluses) is still completely unclear to me.


benj said...

A large army to help keep the peace?

Oh, that's not quite factually correct is it? There haven't been too many Monarchs or Dictators that haven't used their armies to "expand" their rental incomes have there?

Derek said...

At base that's what a monarch's function is: to keep the peace. If he's acting as a Judge and settling squabbles between neighbours; upholding everyone's purchased right to exclusive enjoyment of their plot without everyone else trespassing all over it; arbitrating contract disputes, etc; or if he's acting as a Defender and repelling incursions from neighbouring 100 plot despots then he's providing a service worth having.

Whether he's doing that for a reasonable price is another matter of course. But that's all part of what separates a Benevolent Dictator from an Evil Overlord I suppose.

Woodsy42 said...

"nd repelling incursions from neighbouring 100 plot "

No Derek he doesn't do that - he conscripts the plotholders into his army and makes them do it for themselves.
In fact sometimes he makes them fight people who aren't even planning an incursion.
(Hopefully not if the plan is a caravan park)

Incidentally Mark you can get another accessible plot in plan b by using the central play area differently. More profit that way :-)

Derek said...

Fair point, Woodsy. But even if they had an Owners Association instead of a monarch they would still have to repel incursions themselves. And chances are fair that some of them would free-ride if the Association, monarch or whatever didn't have the power to point out that anyone who didn't help the defence effort would have their plot title put up for public auction.

As for making them invade other caravan sites, we're back to Evil Overlords again. It's a possibility but that's life.

Mark Wadsworth said...

BJ, you've sent everybody off a tangent now.

D, defence is something else which people have to/are happy to pay for, even if it means volunteering. Conversely, going round attacking other countries should be entirely voluntary and preferably on a for-profit basis (which means that wars of invasion would never happen - too expensive).

W42, of course we can squeeze in more houses on the green areas, this post wasn't about the precise geometry of it, it was that infrastructure is self financing.

Robin Smith said...

This is brilliant. Have you read The Unbounded Savannah:

Only a complete twat would deny any of your logic.

The question is - most people in the world today DO deny it.

What are we going to do about that?

Would it be better to put our efforts into figuring THAT out than going over old ground time and again. Its 'completed work'.

Caveat: I'm not knocking your superb analysis. I am asking you to move on to more innovative ground.

The RSI Real Reform:

Join us to talk about this at the TERC, every Friday evening, 530, The Brewmaster, Leicester Sq. RSVP.

Mark Wadsworth said...

RS, thanks.

Yes, you can have an 'unbounded savanah' with option (b) because you can add another 100-plot units to the left or right, above or below and people can then trade with 95 other households instead of 47, nobody loses.

If you plonk down another option (b) layout, then the people at the edge of the original village (who originally had access to the outside world) will end up a lot worse off.

I stuck in the sentence about camp sites because of what happened at Occupy.

You (we) chose a good pitch but other people plonked down their tents willy-nilly and there were no "roads".

One day, the "organisers" then had the initiative to re-arrange the tents tighter together in smaller blocks with "roads" in between, so that everybody could get to their tents without stumbling over other tents in the dark.

Basic slum clearance, so to speak. Everybody wins.

A K Haart said...

Very compelling. What strikes me about it, is that with slightly simpler language you could teach it in schools.

It could be an introduction to all kinds of useful ideas, particularly logic.

Mark Wadsworth said...

AKH, 'they' do teach it.

But they whizz through the logic and focus on the favoured conclusion: "You can make money by buying land and keeping your fingers crossed that its rental value goes up".

It's only if you go through the logic more slowly that somebody tenatively puts his hand up and asks:

"So, sir/miss, are you telling us that the producer and consumer surpluses are generated more or less equally by everybody in the area, whether they own land or not? So why do we allow landowners to collect those surpluses that 'everybody else' generates as higher rents?"

H said...

In the middle ages, a local magnate after some extra cash would petition the monarch for the right to found a conveniently sited town - say at a road crossing. The magnate would make his money from the ability to charge for occupying the land. The monarch would take a cut from regulating the market and the law courts, plus maybe some taxes. And the inhabitants would be able to work and trade, with the wealthier ones being able to select the mayor and burgesses. Everybody happy. All created simply out of location value and the rule of law.

Mark Wadsworth said...

H, that's the same as my post.

The point being, it is the residents who ultimately create the rental value (being total of consumer and producer suplus) and it is they who pay for the 'infrastucture'.

The magnate merely pre-finances some of the infrastructure, but he later makes a profit from user-charges paid by the residents.

In a democracy, "the people" are "the monarch", and "the magnates" are pension funds etc (who are supposed to be acting on behalf of lots of small investors).

All three roles are actually played by "the people".

H said...

Well, I wasn't trying to disagree!

Mark Wadsworth said...

H, aha, sorry.

Bayard said...

"No Derek he doesn't do that - he conscripts the plotholders into his army and makes them do it for themselves."

Since George II was the last monarch to lead his troops into battle, this is a fairly recent innovation. It's surprising that more didn't end up like Richard III.