Free Private Cities: A Market-Oriented Solution to the Problems of Government Intervention

by | Jan 29, 2024 | Academic Article, Featured

Authors: Alexander D. Voss & Hynek Fencl

 

 

Abstract

Free Private Cities (FPCs) are a new model of governance in which a purely private, investor-owned company provides the services of a State in a city-sized area. Free Private Cities attempt to provide Governance-as-a-Service (GAAS) by treating the relationship with residents as that between a service provider and a consumer rather than ruler and subject. The key characteristics of FPCs include a contract signed between the consumer and the FSP Operator, consensual taxes and/or fees charged by the Operator to the resident consumer, and the provision of infrastructure including energy, water treatment, roads, security, dispute resolution, and others. This paper first lays out in detail the risks, pitfalls, and negative consequences of government intervention in the economy and then examines the FPC model of governance to determine if it is distinctive enough to avoid the same pitfalls or if it merely represents a form of privatized statehood that suffers from many or most of the flaws of traditional governments.

Free Private Cities, a Market Oriented Solution to the Problems of Government Intervention

 

Modern nation-states are notoriously involved in almost all aspects of their citizens’ lives. This includes both economic and social decisions. The institutional incentives of the state compel its machinery to be involved in one way or another throughout the economy. In addition, the same incentives push the state in almost all countries and situations to find ways and reasons for increasing the size and scope of its intervention. 

State intervention in the economy, however, is not an equilibrium outcome. Intervention induces more intervention. Economic interventionism is often an attempt to circumvent the laws of economics. As laws, however, they cannot be circumvented; they can only be temporarily denied, with longer-term consequences. Such actions will subsequently lead to down-the-road issues as a result of the ill-considered initial intervention. At present, in most countries in the world, the size and scope of state interventionism are so large that we live in a more or less constant state of intervention; and this interventionism is publicly justified by being supposedly necessary in order to address societal issues which in fact were a result of previous interventions.

One proposed solution, often advocated by adherents to laissez-faire, markets, libertarianism, and Austrian Economics is the concept of a Free Private City (FPC). A Free Private City is, at its core, a city model where governance is privatized. The model consists of several key features which we will outline first and then examine the difference between an FPC and a traditional government. 

When we refer to traditional models of government, we purposely do not make a distinction between democracies, autocracies, dictatorships, republics, and others. While there are notable differences between these types of government, they share a central feature of being top-down and coercive. None of them obtain explicit consent from each resident or citizen and are not subject to the profit and loss calculations, unlike businesses in the private sector. 

From the perspective of this paper, this absence of profit and loss calculations on the market is the key differentiator between FPCs and traditional governments and it is on this basis that we will analyze the economic implications of FPCs.

Finally, in this paper, we will answer the question of whether FPCs, even if perhaps more efficient, are simply a privatized version of statehood that results in interventions that also lead to malinvestments and further interventions. If the answer is affirmative, FPCs may represent a slight improvement in governance, but hardly a revolutionary change. On the other hand, if FPCs are able to avoid this and become market players rather than new governments, the implementation of FPCs in practice would not just increase human liberty and economic prosperity, it would unlock completely new — more consensual and sustainable — modes of living together.

With that roadmap, we begin first by examining the role of government intervention in an economy and explain the negative and unstable results of such intervention. Then, we will explain the core of the Free Private City model. Finally, we will apply the model to determine whether FPCs are actually able to solve the key problems of government intervention.

 

Government Intervention and Its Impact on the Economy

While governments perform many diverse functions, their activities can be conceptually collated into two major groups: 1) transfer payments, and 2) resource-using interventions. We will analyze these in turn.

 

Transfer Payments

In a free market, wealth is acquired through the combination of production and exchange. Implicit in a free-market system is the voluntary nature of these processes. People express their wants and needs, demand certain products and services, and, in turn, use their labor and existing resources to produce what is desired by others. Exchange then facilitates specialization, which enables much higher efficiency in production as well as in the allocation of both input and output resources.

In such a completely voluntary economy, one’s earnings correspond to what others in society are willing to give up in order to receive the products of one’s labor (subject to friction within the system). The subjectivity of value enables such an exchange to be beneficial for all parties rather than a zero-sum game.

In a completely voluntary economy, it only makes sense to talk about a “distribution” of wealth in the context of production. The only mechanism for obtaining wealth is producing more value, as determined by other members of society (charity could be considered to be another mechanism of acquiring wealth, but it is better understood as a special case of exchange, where tangible wealth is exchanged for psychological or spiritual value).

If intervention is introduced into this economy and the market is no longer unhampered, a new mechanism for obtaining wealth or control over resources is created. This mechanism is to use the apparatus of the state (monopoly on legal force) to seize wealth from producers of value, transferring it into the hands of the agents of said state. In this process, “earnings are severed from production and exchange and become separately determined” (Rothbard, 2009, 1255). To the extent that this process takes place in society, “the allocation of earnings is distorted away” from the most efficient providers.

On the unhampered market, when the property rights in the proceeds from production and exchange are undisturbed, the compensation received for the value one has created forms an important feedback loop. Government intervention in this process dampens this feedback loop, discouraging effective and socially beneficial production.

Another, more hidden effect of this intervention is the lowering of the amount of control that consumers have over the overall production of goods and services in society. On the unhampered market, production is oriented toward satisfying potential customers. When the state seizes value from those who have produced and, by implication, places it in the hands of those who have not, consumers thereby lose part of their ability to reward desirable production and discourage unwanted or ineffective production. This consequently leads to producers at large being less able to satisfy the needs and wants of consumers.

One additional notable distortion effect created by the introduction of government intervention mechanisms in the economy is the incentivization of people to steer away from productive activities and toward using this “tool” to acquire wealth instead. The state thereby opens the door to a new form of obtaining wealth — political entrepreneurship. The central feature of political entrepreneurship is not an economical production of higher-valued outputs from lower-valued inputs but securing access to decision-making power that controls how wealth is seized and distributed afterward. Through political entrepreneurship, individuals and their networks can benefit from someone else’s value production without producing something on their own — they are obtaining wealth without creating value first, which amounts to a net reduction of wealth in society.

Finally, transfer payments create a class of net taxpayers and net tax beneficiaries. This class division foments social strife, resentment, and ill will in society. Those who receive wealth without producing value first are incentivized away from producing value or learning how to do so. As such, transfer payments are not a stable equilibrium. Ceteris paribus, their scope and extent will necessarily grow until the interventionist system changes or collapses altogether.

 

Resource-Using Activities

The second broad form of government intervention consists of the government using factors of production towards its own ends rather than the ends chosen by producers trying to satisfy consumers. In this role, the government is taking on the role of the entrepreneur in so far as it is taking scarce inputs, be it natural or capital goods, and using them to create output products. However, unlike real entrepreneurs, due to the government’s unique position in the economy, it is unable to do this in a manner that is efficient or just.

Resource-using activities are a particularly interesting form of government intervention to study, as they are fundamentally misunderstood by most schools of economics. The Keynesian school, for example, views government spending as a viable means of “investment”. This view implies that the government is able to make appropriate tradeoffs between diverse situations, wealth, and values (by taking money from net taxpayers and spending it on goods that are valued differently by different people). It also implies that governments are able to make such prudent tradeoffs not just in the present but also over time (by taking money from net taxpayers today and spending it on producer goods or investments to be used to satisfy consumers in the future). By doing this, the government is deciding how much all of society should produce or consume today versus tomorrow or a hundred years. In short, the Keynesian view exhibits wildly unrealistic assumptions about the capabilities and incentives of governments.

In contrast, it is worth exploring resource-using government intervention from the perspective of the Austrian school of economics. Whereas the Keynesians view government spending as “investment”, Austrian-school economist Murray Rothbard argues: 

“[O]n the contrary, all of this expenditure must be considered consumption. Investment occurs where producers’ goods are bought by entrepreneurs, not at all for their own use or satisfaction, but merely to reshape and resell them to others—ultimately to the consumers. But government redirects the resources of society to its ends, chosen by it and backed by the use of force. Hence, these purchases must be considered consumption expenditures, whatever their intention or physical result. They are a particularly wasteful form of “consumption,” however, since they are generally not regarded as consumption expenditures by government officials.” (Rothbard, 2009, 1259)

Resource-using interventions can take the form of the government offering goods or services both nominally “for free” or for a price. While this distinction might matter for the end consumer, it is irrelevant to this analysis. This is because the government has to use scarce means to provide said goods or services. It may charge no price but it is utilizing resources that could otherwise be used in other industries or for other production processes. 

More important than the price charged is the separation between payment and provision of a good or service provided by the government (Rothbard, 2009, 1260).  On the private market, producers acquire inputs from others for a price and combine them into outputs. At the point of sale, consumers pay the price for the good and producers receive this payment. This is not the case with government intervention. The government is able to acquire the resources needed via coercion, creating a disconnect between the acquisition of and payment for resources.

This split has important consequences. Following the method used by the Austrian school of economics, we will explore these consequences from the perspective of cause and effect. 

First, the price charged in the market by the government will be arbitrary to some degree or another. Since governments generally promote the idea that they are providing the “public good”, they frequently charge too little on the open market. Numerous examples include free access to parks, parking permits being cheaper than they would be on the free market, and bus fares that are cheaper than a private entrepreneur might charge. 

When the charged price is lower than the market price, more of that good or service is demanded and less is supplied than would be in the private market. This leads to shortages of many important resources and the inevitable calls for consumers to cut back on their use of these resources, as well as pressure for private companies to increase supply in an economically long-term-unsustainable way.

In addition to shortages that would not be experienced on the free market, resources are also allocated inefficiently. In a market where prices fluctuate according to entrepreneurial assessments of consumer demand, prices will help allocate demand to its most valuable end. When prices rise, people who might be using the resource but don’t absolutely need it will reduce their use of this resource for these dispensable ends. This allows more of the resource to be used for more highly valued ends. An easy example involves water supplies in natural disaster areas. Not preventing the price of a water bottle from rising ensures that people only buy enough to drink and survive for a period of time and do not buy it right now to, say, stockpile in their basement and take bottled water showers. This sort of decision-making on the margin is always present in consumers and prices send the correct signals so that they can economize based on the scarcity of a resource at any given time and location. 

In addition, the higher the price of a good, the greater the signal to entrepreneurs to find ways to bring the resource to where it is needed most. In our example above, the price of water increasing to $15 per bottle would be an obvious immediate profit opportunity for entrepreneurs to buy water in one place and drive to the disaster zone to sell for a profit. This is the best feedback possible in order to cut use demand where it is not absolutely necessary while increasing supply at the same time, which ultimately results in the elimination of the momentary scarcity of this good as quickly as possible.

The reverse will occur when the government overcharges for certain goods. Examples might include imposing permits to build or operate a business or overcharging for parking on a weekend. In this case, the market price would be lower than what is charged by the government. Therefore, the result is more land being allocated towards parking leading to an abundance of open parking spaces and a lack of interest from consumers in utilizing the parking facilities provided by the government. This is clearly inefficient and would not happen on the market, which might charge higher prices on some days/times and lower prices on others to attempt to maximize the revenue coming from an earlier investment.

While recognizing the inherent inefficiency of government provision of goods and services, many advocates of improving governance encourage the government to operate “as if” it were a business. Presumably, by this, they mean that the bureaus of the government should simply act like for-profit businesses. Unfortunately, this fundamentally misses the point. Being a for-profit business is not something a government bureau can fake. To be able to operate as a for-profit business, one must face the same incentives. Capital must actually be at risk, as it would be if the goods or services provider was an entrepreneur. 

Bureaucrats don’t have the same incentives as entrepreneurs in a profit-making business. Instead, they are graded on various internal metrics and compensated accordingly. This might be things such as the number of customers served, how well one checks the boxes or other easily measured metrics. Bureaucrats, however, are not compensated more for increasing the profit of the enterprise because there is no profit to be measured. In a private, for-profit company, while some middle managers’ bonuses may not be tied to how well their division performed, the decisions of who to employ in these middle management positions and how to compensate them are themselves set by the owners or the capitalist-entrepreneurs of the firm. Therefore, the decisions made are kept in line with profit maximization. Even if a decision is outsourced to managers, the capitalist-entrepreneurs make the entrepreneurial decision to outsource that decision-making and will reap the rewards or costs accordingly in their profit or loss.

Further, and perhaps most importantly, we have shown that the problem of government intervention and the resulting split between the provision of good or service and the payment for it fundamentally comes down to the lack of ability of the government enterprise to make decisions that would be in accordance with the goods’ allocations and pricing that would have occurred on the free market. 

This conclusion lends itself to a follow-up question: if we are aiming to provide goods and services as efficiently as possible (i.e. providing goods and services in both the quantity and price that would be charged on the free market), why not just let private actors in the free market be providers instead of the government?

One final problem of government provision of goods and services is that the government is taking resources from the private market that could and would otherwise be used in other ways. Land used for building a parking lot could perhaps be used more efficiently for building a residential complex. The steel used in the making of warships and nuclear submarines could perhaps be used to make cars or rails. The government is not able to discern how resources should be used or which use of these resources best satisfies consumer wants. Instead, they are simply extracted from the economy and used for arbitrary purposes with unquantifiable benefits. This necessarily limits the absolute amount of the resources available for other, provably productive uses.

In addition, when the government takes resources from the market, it creates non-market demand for goods which will distort relative pricing across all resources and factors of production. The result is that the economy will produce different things than it otherwise might, leading to a greater scarcity of actually demanded goods and a consequent reduction of consumer welfare.

Consider a small country A that produces only a very limited amount of steel. Country A’s military may require the use of all steel in the country as well as importing more from abroad. This artificial demand for steel drives up the prices of steel which then sends signals to entrepreneurs to try to produce more steel. It also sends signals to entrepreneurs to try to build products and services that do not demand steel as steel is artificially more expensive than it otherwise would be. These two resulting effects will also then permeate throughout the economy following a similar logic as that of the Cantillon Effect. Consequently, entrepreneurs are, on the margin, spending more time, effort, energy, and resources building steel-generating and non-steel-using businesses than they otherwise might be. This prevents the same resources from being used for the production of other goods, leading to consumers being less able to satisfy their needs and wants.

As we have seen throughout this section, when the government intervenes in the market by using resources taken from the market to provide goods or services, this has profound effects on the nature of the economy. Perhaps the most severe issue the government faces is its ability to access capital via force. Voluntary trade in the free market is always a net benefit and mutually beneficial ex-ante. By making use of force, the government stops engaging in voluntary trade, and thus its activities do not exhibit the same quality.

Finally, to the extent that the government provides something valuable and at the price that the market would demand, this negates the need for the government in the first place. Given the nature of the intervention by the government and the resulting negative economic consequences that inevitably follow, resource-using intervention is also not a stable equilibrium and creates the perceived need for further future intervention.

Having analyzed the consequences of government interventionism on the economy, we now turn to describe a recently introduced model of governance, the Free Private City. Finally, we will analyze whether this new model actually solves the issues described above concerning government intervention in the economy.

 

What Is an FPC?

In the previous section, we analyzed the role that government intervention plays in an economy. We concluded by noting that government intervention is inefficient by definition, and therefore cannot maximize welfare. We have also seen that governments do not face the correct incentives in order to be able to operate like a business. Therefore, to achieve improvements in consumer and societal welfare, advocacy for more efficient government is misplaced, while arguments for reducing the size and scope of government are more suitable. 

Next, our aim is to present a new governance model, a Free Private City, in order to determine if the FPC can actually solve any of the problems highlighted earlier or if it falls victim to the same shortcomings.

A Free Private City is a semi-autonomous zone within the territory of a Host State. It is part of the constitutional framework of the Host State and can only be established if a national framework exists to designate certain parts of the country as Special Administrative Regions (SAR). While this term originates with Hong Kong and Macau in China to describe a “one country, two systems” arrangement, the concept of SARs can be understood universally to mean Special Economic Zones (SEZ) brought to a new level by enabling more local autonomy, especially for residential populations.

If a national SAR framework exists, a prospective operating company (FPC Operator) can then negotiate with the government the establishment of an FPC in a specific unoccupied area, where the FPC Operator gains internal governance autonomy in accordance with the SAR legal framework in exchange for bringing in foreign investment, employment opportunities and economic growth, as well as direct payments or profit-sharing. The agreement between the Operator and the Host State government should be anchored in international law via investment protection treaties to ensure the stability of the city’s legal status even in the face of future Host State changes in government.

In a Free Private City, governance is viewed as a service. The FPC model sees it as a positively valuable service that will be paid for by willing customers on the free market. An FPC Operator is a developer and manager of a piece of land that sets the rules, regulations, and dispute resolution mechanisms for this territory. In said territory, the Operator is autonomous (subject to an agreement with the Host State on whose territory the FPC is located) and strives to make a profit. To visit or reside in the FPC, each individual must sign (or consent to) a contract with the Operator. Given the need for such a contract to be signed with each prospective resident, FPCs must develop on greenfield territory to prevent involuntary imposition on existing inhabitants.

The Operator also acts as a developer and provider of communal infrastructure. It must provide for the basic needs of a community like any other local government if it is to attract residents to move there. While not comprehensive, this list includes energy resources and distribution, access to fresh water and water treatment and filtration systems, internet, roads, and other basic services. While some of these can and will be provided by other service providers, the Operator must ensure the provision of these services if there is insufficient interest from other private parties to provide them independently (Gebel, 2022).

Finally, the Operator of an FPC is compensated according to mutually agreed-upon contracts with its clients who pay for its services. Given the current market outlook, explicitly stated desires of current entrepreneurs attempting to build FPCs, and a general trend in markets towards a consistent price, we suggest that the compensation arrangement between residents and FPC operators will take the form of flat fees rather than a tax in most cases where this is not prevented through the Operator’s contract with the Host State. Given the current market information cited above, it is plausible to assume that an FPC Operator might charge ca. $1000 per year for security, ca. $1000 for dispute resolution services, and ca. $500 for general maintenance, resulting in a total fee of $2,500 per year. These numbers are directional and not meant to indicate precise payments in any future FPCs.

As a novel and innovative model, Free Private Cities deserve a much deeper analysis and treatment elsewhere. However, for the purposes of this paper, this introduction to FPCs is extensive enough. In sum, an FPC consists of physical territory, governed by a profit-motivated company, that signs a real contract with residents, vouching to provide certain services in exchange for contractually guaranteed fees paid by the residents. No party can unilaterally change the contract and all parties must abide by their agreements.

 

Does an FPC Solve the Problems of Government Intervention?

It is often stated or simply presumed that a single-purpose government enterprise, as long as it is operating within the private market, can price its services and allocate its resources efficiently. This assumption, however, is incorrect. There is a fatal flaw that permeates all government enterprise and prevents it from rational pricing and efficient allocation of resources — the backdrop of unlimited “reserve” funds. Even if the government engages in transactions on the free market, its activities always enjoy the possibility of a fallback on tax-sourced funds in case of failure. This crucial factor again distorts the incentives of the government enterprise in question. Because of this flaw, government enterprises cannot be “operated as a business”, no matter what the government’s intentions are.

This context is crucial to the question of whether an FPC can actually solve the problem of government intervention. It could be that, due to the Operator’s central role within the FPC, the model simply mirrors the incentives of governments, together with the inevitable intervention failures. In such a scenario, the FPC could be trying to “operate as a business” despite, in fact, being more akin to a traditional government and, therefore, being subject to the same pitfalls.

However, we contend that an FPC does genuinely reform the provision of governance services because it fundamentally reconstructs the nature of the relationship between government and citizens to approximate a service provider and customer instead of a ruler and subject. Here, the service provider is simply an entrepreneur on the private market who faces uncertainty and must find a way to provide consumers with something they value more than the price at which the service provider is willing to sell this service. 

We will in turn look at a number of aspects of the FPC model and highlight how the model fundamentally changes the nature of the provision of governance services and how these changes allow for the market of governance to economize on the production of goods and services as it would and does in other unhampered markets.

First and foremost, FPCs are run by for-profit companies operating in the free market. This means they access resources in the same way as any other capitalist-entrepreneur: they must acquire them through voluntary exchange in transactions where both sides benefit ex-ante (or else they would not engage in said exchange). 

Murray Rothbard elaborates on the aforementioned fatal flaw of government intervention thus: 

“[G]overnment can obtain virtually unlimited resources by means of its coercive tax power. Private businesses must obtain their funds from investors. It is this allocation of funds by investors on the basis of time preference and foresight that rations funds and resources to the most profitable and therefore the most serviceable uses. Private firms can get funds only from consumers and investors; they can get funds, in other words, only from people who value and buy their services and from investors who are willing to risk investment of their saved funds in anticipation of profit. In short, payment and service are, once again, indissolubly linked on the market. Government, on the other hand, can get as much money as it likes. The free market provides a “mechanism” for allocating funds for future and present consumption, for directing resources to their most value-productive uses for all people. It thereby provides a means for businessmen to allocate resources and to price services to ensure such optimum use. Government, however, has no checkrein on itself, i.e., no requirement for meeting a profit-and-loss test of valued service to consumers, to enable it to obtain funds. Private enterprises can get funds only from satisfied, valuing customers and from investors guided by profits and losses. Government can get funds literally at its own whim” (Rothbard, 2009, 1262). 

Given the profit motivation and the lack of ability to coerce resources from society, an FPC is fundamentally different from a government as traditionally conceived. FPC Operators must raise capital on the open market by convincing investors of the profit opportunity in front of them. Then, they must actually execute on that profit opportunity, all while accessing resources only through voluntary means. 

Of course, nothing about an FPC Operator makes it uniquely better at forecasting consumer desires, and in that sense, it is possible that an Operator could turn out to make poor decisions. Where the distinction from traditional government lies is not that the Operator might get the economic calculation wrong but that, in the case it does, it will quickly suffer the consequences via actual monetary losses, which will force it to swiftly adapt or go bankrupt. Traditional governments, on the other hand, have a track record of falling back on tax-sourced funds when their enterprise is not performing well while attributing such failures to external factors or competitors.

 

Does resource-using intervention by an FPC Operator lower consumer welfare?

We have seen earlier that resource-using intervention by governments faces additional distinct challenges which cause it to lead to lower consumer welfare. In particular, resource-using intervention takes resources that might be used in other productive processes and allocates them where they are not most highly valued. In addition, we have argued, following Rothbard, that all government spending must be considered consumption as resources used in such interventions have to be extracted from the private economy before being spent on other ends that are determined arbitrarily by the government in the absence of market signals. 

FPCs are not subject to this effect. While FPC Operators will use resources when they develop and operate a city, they are subject to the profit-and-loss calculation and therefore will have to economize in their decisions on what resources to use. This is no different economically than, say, a large car manufacturer deciding whether to use plastic or steel in the production of its new car model. On the one hand, more scarce resources might be used than otherwise, but these resources are used by the entrepreneur to produce the highest profit possible. The highest profit is, in turn, generated by best satisfying consumers’ wants and thereby being able to charge the highest price possible, while finding the cheapest resources available to produce said goods or services.

This is the kind of economizing that all private-sector actors have to engage in in order to be successful in a competitive market. FPC Operators face the same incentives and constraints. While an Operator might spend significant money on a new energy grid system or in building new roads just like a local government might, the risk and payoff are aligned in order to incentivize good decisions. In contrast, the traditional government extracts resources in a coercive way and therefore we cannot know if it is efficient in its entrepreneurial ventures or not. 

This logic persists for all other so-called public goods as well. An FPC Operator might know that providing parking in the city will incur costs without a directly associated revenue stream. Nonetheless, the Operator may provide it anyway, much like private malls provide on-site parking because it is simply necessary for an overall quality of life or the services provided. This means that, from the Operator’s perspective, the cost of parking must be bundled with other revenue streams in order to build a high-quality product that will be voluntarily purchased by consumers.

The next way in which an FPC is unequivocally different, more voluntary, and therefore more efficient than the traditional government is via the contract mechanism in place with the general service provider. An FPC provides governance as a service. This service is valuable in that it provides basic security and dispute resolution between and among residents. While we cannot know the value of this service when and where it is provided by traditional governments, we do know it is valuable and welfare-enhancing when an FPC Operator provides it. We know this because every resident in an FPC has signed a real contract with the Operator. Since this contract is voluntarily agreed to, we know ex-ante that both parties to the agreement are better off and, therefore, the service provided by the Operator has clear positive value — it enhances consumer and societal welfare. Therefore, if and to the extent that an FPC Operator is successful on the free market, it is successful because it provides a service that is found valuable by the consumers — or, in this case, residents.

 

Do transfer payments by an FPC Operator lower consumer welfare?

While transfer payments distribute resources away from productive members of society to the less productive when done by traditional governments, the same cannot be said for FPCs. By default, since FPCs are profit-seeking enterprises with no power of coercion, their revenues generated are legitimately earned and may be used for any further purpose without necessarily causing market distortion. The funds earned by an FPC Operator are not extracted by coercion and subsequently distributed to others. Rather, they are received on the free market for providing a valuable service in the first place. From this revenue, the Operator might then choose to pay shareholder dividends, reinvest in further development of the city or its own corollary business — or it may decide to give away these funds as charitable donations to some city residents. While we doubt the latter will happen to an extensive degree in an FPC, such payments or donations do not reduce overall societal welfare, as the money in question was, at every step, transferred through a voluntary and consensual process, increasing societal welfare ex-ante.

Finally, while taxes are properly understood as a form of involuntary, forced payment, this is not the case in an FPC. Regardless of how the Operator’s compensation is structured, any payment from residents to this Operator is necessarily voluntary because it had been freely agreed to beforehand. Each contract, including all clauses, scope of services, and compensation are reviewed by both parties (the resident and the FPC Operator) before the parties agree to be bound by the contract. If they do so, they indicate that they expect the relationship they are entering into to be mutually beneficial. Within this framework, even hypothetical seemingly exorbitant fees or taxes of 99% of one’s income would actually not be confiscatory but rather a mutually beneficial market transaction, as long as such a relationship is established voluntarily and with informed consent.

In summary, there are three main aspects in which FPCs are fundamentally different than other traditional and coercive governance models: 1.) the provision of communal goods 2.) the contractual arrangement between the FPC Operator, and 3.) taxes or fees paid to the Operator. Though it might seem as if the FPC Operator’s activities in the economy constitute intervention, this is not the case. The Operator’s character as a private company and its inability to source its funds in a coercive way prevent perverse incentives from being present in such activities. This means that despite the FPC Operator’s prominent role in the FPC’s “domestic” economy, the market can function undisturbed. In contrast with a traditional government, the Operator’s economic activities also do not create an unstable situation where the consequences of a previous intervention would seemingly require further intervention to be instituted as a “countermeasure” or a “solution.”

 

Conclusion

An economy composed of only voluntary interactions will improve societal welfare with every transaction. Any intervention by the government, either by way of transfer or resource-using intervention will necessarily lead to lower welfare in society. We can observe that this is true by definition, even without having to consider the specifics of the intervention at hand.

In a Free Private City, a governance model is introduced where economic sectors previously administered in a non-consensual way are transformed to approximate standard, voluntary commercial relations. This is true both for payments made by residents to the FPC Operator and the economic and entrepreneurial activities pursued on the market by the Operator. In addition, even transfer payments initiated by the Operator do not exhibit the same negative societal effects as in the case of the government, as all such funds have been consensually obtained in the first place.

We noted in this paper that while we cannot discern the value of services provided by the government (and in many cases, we can argue that the value provided is actually negative), we argued that many people may find governance a valuable service they are willing to pay for voluntarily. Following the same assumption, FPCs have been proposed as a way to privatize governance and transform it from a relationship between a ruler and subject to a relationship of service provider and customer. 

While we have shown that it is impossible for the government to operate “as if it was a business” due to its unique ability to obtain funding through force, we found that FPCs fundamentally change the nature of the provision of governance services to avoid this issue. The result is that FPC Operators can undertake entrepreneurial ventures on the market without causing market distortions and disequilibria.

We do not claim that all FPCs will be successful, or even that any will be successful. Their success, like with any other business on the free market, depends on the skills and abilities of the entrepreneurs attempting to predict customer demand in this market and generate revenues higher than cost and consumer’s reception of said service — a risky venture where predictions can always turn out incorrect in the end. Rather than predicting success, we argue in this paper that if an FPC is, in fact, successful and commercially viable in the private market, it is successful because it provides a positively valuable service. Since this service is paid for voluntarily, its effects on the market avoid the problems of government intervention, be it transfer payments or resource-using activities. Unlike its government-based alternative, an FPC Operator is always incentivized away from wasting or misallocating resources. 

In summary, while Free Private Cities are a new model that may prove difficult to establish or operate, they present a genuine change to the nature of governance that is in line with the principles of consent and individual rights while improving the overall societal welfare and prosperity.

 

Discussion

In this paper, we have established the ex-ante positive value brought to customers by FPCs and their Operators. Since by contrast, the value brought by governments is indiscernible at best and frequently negative, FPCs represent a promising governance alternative to traditional political systems.

Nevertheless, this paper did not explore the details of how FPCs are best financed, developed, or operated. Neither did it explore the question of what might happen in the city if and when an FPC Operator goes bankrupt. Finally, a question of relations between the FPC Operator and the Host State government is always present, and as to how best to ensure long-lasting and mutually beneficial cooperation. Our opinion is that the FPC model will answer all these and other questions in a satisfactory way, as it genuinely represents a major step forward in the models of governance practiced in the world today; nevertheless, we would like to see these topics further explored and analyzed.

 

References

  • Gebel, T. (2018). Free Private Cities: Making Governments Compete for You. Createspace Independent Publishing Platform.
  • Rothbard, M. N. (2009). Man, economy, and state: A treatise on economic principles; with Power and market: Government and the economy. Ludwig Von Mises Institute.