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Planning and the Two Coordinations,
With Illustration in Urban Transit

Daniel B. Klein
Department of Economics
Santa Clara University
Santa Clara, CA 95053



"It turns out, of course, that Mises was right." Thus the economist Robert Heilbroner concluded on the great debate over central economic planning. Yet for urban transit, researchers and planners still argue that central planning is necessary to coordinate the system. Do Mises and Hayek not apply to transit? Planners might associate the Hayekian learning with rarified economic models, and the Hayekian prescription with perfect competition. They might maintain that a policy of "free competition" for urban transit leads to numerous problems. But are such problems a failure of the Hayekian philosophy? Hayek's idea of the free economy was not atomistic exchange and mechanistic markets, but rather a system of voluntary planning embodied in the nexus of property, consent and contract. Hayek’s line of reasoning points toward proprietary governance. Urban transit serves as a contextual example to clarify Hayekian thinking about planning and coordination.


  1. Introduction

  2. Schelling Coordination And Hayek Coordination

  3. "Free Competition" For Urban Transit

  4. Problems With "Free Competition" In Urban Transit

  5. Is "Free Competition" Really Hayek's Message?

  6. The Hayekian Proposal: Proprietary Governance

  7. A Sketch Of The Hayekian Argument For Urban Transit

  8. Can Local Government Mimic Proprietary Governance?

  9. Conclusion





United cooperative societies are to regulate national production upon a common plan, thus taking it under their own control and putting an end to the constant anarchy and periodical convulsions ... of capitalist production.

-- Karl Marx ([1871], 213)

Much of the opposition to a system of freedom under general laws arises from the inability to conceive of an effective co-ordination of human activities without deliberate organization by a commanding intelligence.

-- Friedrich Hayek (1960, 159; italics added)

Urban and transportation planners seem to believe in the necessity and desirability of urban planning. This belief is so fundamental that it is often taken for granted. The pattern of thought among transportation planners has been noted by Donald Chisholm (1989, 13): "coordination and centralization have become virtually synonymous. Where a need for coordination is perceived, the reflexive response is centralization."

Why ought the urban transit system be planned by government? The common response is as follows: In a large urban society the transit needs of the people, and the schedules, routes, and modes of the vehicles that serve them, become so numerous and so complex that the only way to coordinate the pieces is by central administration.

To a student of economic thought, this argument might ring a lot of bells, for this argument sounds essentially identical to the argument at the heart of one of the greatest debates within economic theory during the twentieth century. What one may find so powerfully striking is that this argument, which seems to be accepted wisdom among urban and transportation researchers today, was in fact on the losing side of the great debate.

I refer to the debate over economic calculation and planning in a socialist system. Advocates of central planning had long cited the complexity of industrial activity as a prima facie argument against the "anarchy of the marketplace." Karl Marx said (1867, 530), "The capitalist mode of production ... begets by its anarchical system of competition, the most outrageous squandering of labour-power and of the social means of production." In the capitalist economy, "great disturbances may and must constantly occur." Under socialism economic affairs would be organized like "one immense factory," "upon a common plan" (1885, 315; 1871, 213). Nicolai Bukharin again criticized capitalism for being guided by "blind power ... not by a conscious calculation by the community." He called for a "new society which is consciously planned and consciously executed" (1917, 49; 1920, 68).

In the early 1920s Ludwig von Mises (1920, 1922) forcefully argued that only by the competitive forces of the free-market regime are the decentralized elements of the economy appropriately utilized. The system is indeed complex and beyond human comprehension. But that is no reason to attempt to replace it by a system of central direction. Price signals and the pursuit of profit lead the vast and varied lines of activity to be self-coordinating.

Oskar Lange (1938) declared that it was Mises's "powerful challenge that forced the socialists to recognize the importance of an adequate system of economic accounting to guide the allocation of resources in a socialist economy." Lange declared that "a statue of Professor Mises ought to occupy an honorable place in the great hall of the ... Central Planning Board of the socialist state" (p. 57). He conceded that Mises's point was valid, yet believed that it was not fatal to socialism. The solution that Lange and others (1) proposed was a scheme whereby the workings of the market economy, or, at any rate, the workings according to the model of perfect competition, would be simulated within the socialist system. Factory managers would be instructed to minimize average cost, set output to equate marginal cost and price, and so on. Prices would be dictated by the central planning authority. In each period, information about excess demands and excess supplies would be relayed to the central authority, which would revise prices with the aim of making markets clear. In this procedure of trial-and-error the system would coordinate itself by mimicking the self-coordinating forces of the market economy.

Friedrich Hayek, who had studied closely with Mises in Vienna, responded to the market-simulation solution. His criticism (1940) exposed many fundamental problems of the scheme. Hayek showed that Lange's scheme was founded on the rarified and even misleading representation of market forces that was cutting edge theory of the day, and which nowadays is textbook boilerplate. Hayek argued that without making the incentives genuine from the bottom up, and giving agents the freedom and flexibility to act on their hunches and expectations and special opportunities, nothing like a free-market economy would come from the simulation effort.

The broad question over government planning has revolved around the issue of coordination within complex systems. In The Road to Serfdom (1944) Hayek summarizes the view of the planners in this way: "What they generally suggest is that the increasing difficulty of obtaining a coherent picture of the complete economic process makes it indispensable that this should be co-ordinated by some central agency." Hayek of course dissents: "[In the market economy we depend] on that division of knowledge between individuals whose separate efforts are co-ordinated by the impersonal mechanism for transmitting the relevant information known by us as the price system." The view of the planners was not merely incomplete or inadequate, it was dead wrong: "Any further growth of its complexity, therefore, far from making central direction more necessary, makes it more important than ever that we should use a technique which does not depend on conscious control" (pp. 48-50).

There can be little dispute that Mises and Hayek were correct in the debate about centralized economic planning. In 1990 the former socialist Robert Heilbroner (1990, 92) declared, "It turns out, of course, that Mises was right."

It is curious that while the Hayekians have won the socialism debate, transit planning remains intellectually unimpeached. Either the Hayekian arguments do not apply to transit planning or they are not well understood. Hayek would maintain that the lessons of the great debate do apply: "planners do not yet realise that they are socialists and that, therefore, what the economist has to say with regard to socialism applies also to them" (Hayek 1933, p. 32).

In this paper I use the example of urban transit to clarify Hayek’s position. I will argue that Hayekian claims about "coordination through the price system" are often misunderstood because the term "coordination" has two distinct meanings. Distinguishing between the two coordinations leads us into clarification of another critical term, "planning." This paper is not intended as a manifesto for the Hayekian policy position in urban transit. Rather, it utilizes the example of urban transit to clarify the nature of that position on any similar urban issue, and merely sketches how argumentation for that position proceeds.


Before turning to urban transit, let us explore the notion of coordination. "Coordination" is a crucial term in the vocabulary of Edwin Cannan, Hayek, Michael Polanyi, William H. Hutt, Ronald Coase, Israel Kirzner, Harold Demsetz, and many others. I take Hayek to be emblematic of this tradition. I will argue that the Hayekian notion of coordination follows but one of the two understandings we have of that term.

Coordination is first and best understood as something we hope to achieve in our interaction with others. I hope to drive on the same side of the road as others, I hope to use the same semantics as do my listeners, I hope to go to the same place in Manhattan as the person I wish to meet. In these cases, we hope to coordinate our actions with the actions of others, by coordinating to some common principle or focal point. You say, "Make it Grand Central Station at noon," and I coordinate to that remark, and hope to coordinate my action with yours.

The features of this type of coordination have been richly explored by Thomas Schelling in his seminal work The Strategy of Conflict (1960). I will sometimes refer to it as Schelling coordination. Schelling coordination has been given more formal structure by the philosopher David K. Lewis in his book Convention: A Philosophical Study (1969). Lewis uses formal game models to characterize situations. Figure 1 shows a road game. A set of strategies -- such as, for you: drive on the Left, and for me: drive on the Left -- constitutes a coordination equilibrium when two distinct kinds of requirements are satisfied. The first is the Nash requirement, namely, given that you are choosing Left, my choosing Left is best for me (and likewise for the statement that reverses you and me). The second goes beyond Nash; it requires that, given that I am choosing Left, your choosing Left is best for me (and likewise for the statement that reverses you and me). Coordination equilibrium is Nash equilibrium plus this second requirement (suitably generalized). Both of us driving on the Left is a coordination equilibrium, as is both of us driving on the Right.














Figure 1: A Coordination Problem Containing Two Coordination Equilibria


In a situation with two coordination equilibria, we face, in Lewis's terminology, a coordination problem, because we may have difficulty coordinating with each other. We need a common principle or focal point to get us to a coordination equilibrium. Individuals make a conscious effort to coordinate with each other, or at least to coordinate to a focal point. They strive for and see a meeting of decisions in their own activities. Schelling coordination is manifest.

Now, is this what Hayek has in mind? When Hayek speaks of our separate efforts being coordinated by the impersonal mechanism known as the price system, can we reduce this to a matter of Schelling coordination? It is true that market participants are achieving face-to-face coordination, by sharing a common language, a common measure of time, and so on. Everyone at the office arrives by nine o'clock in the morning and this coordination enhances productivity. But Hayek has more in mind. He means that when the maker of electronic components runs his shop in Korea, that activity is well coordinated to the activities of the California retailer, who some time later sells tape recorders which use the components. There is a flavor of Schelling coordination here, but only a flavor. First of all, the retailer and the components maker do not even know of each other's existence, and have no manifest sense of coordinating their action with each other. If one were to visualize a "game" which included all of their relevant strategy alternatives, it would have to be a game that also included the relevant strategies of hundreds or thousands or even millions of other players alike. Such an exercise would depart from the spirit, if not the formal structure, of noncooperative game theory, which draws up games with an understanding that that is how the game is understood by the players. This is the "common knowledge" assumption of game theory.

Hayek emphasizes that the context understood by the individual is local and very limited. The retailer sees only the distributor, not the manufacturer. The individual uses common cultural focal points to carry out interaction with others, but this is like the baton pass between members of a relay team. He confronts problems that do not lie in achieving manifest coordination, but in activities analogous to running alone with baton in hand. He is responding to price signals and local opportunities; he is trying to gain lucrative insights; he is working hard to keep his promises, and to see that his trading partners keep theirs. He does not perceive himself to be playing a coordination game with myriad distant people. As Adam Smith (1776, 423) put it, each promotes "an end which was no part of his intention" -- nor even of his knowledge.

And there is another important point which suggests that Hayek coordination is not Schelling coordination. Hayek coordination must involve myriad individuals. Now, shall the "game" include the retailer's competitors? If we include the competitors -- and doing so would seem essential to a Hayekian framework -- it becomes plain that market outcomes are not coordination outcomes. Whether we think of coordination equilibrium in formal games or of resolutions in Schelling's parables, the outcome in which the two retailers compete is not an instance of coordination. Retailer A, given his own action, is not best satisfied by the rivalrous actions taken by retailer B. Retailer A is not best satisfied when the distributor supplies articles not only to him, but also to retailer B. Most fundamentally, Retailer A is not best satisfied when the distributor raises his price! Or when the customer departs without having made a purchase!

The point is not that Hayek erred in choosing his words, but that "coordination" has two meanings. Merriam-Webster's Collegiate Dictionary (10th ed.) offers a definition for coordinate as an intransitive verb, "to be or become coordinate esp. so as to act together in a smooth concerted way" (italics added). This is Schelling coordination; I coordinate with my friend to meet this afternoon. As is the case for any intransitive verb, there can be a direct object only of a reflexive kind: I coordinate my doings, or our doing, or our plans, to meet this afternoon. In this fashion we could make the intransitive verb to walk superficially (and only superficially) transitive: I walk my body down the street. For the transitive verb, Merrian Webster’s offers, "to put in the same order or rank ... to bring into common action, movement, or condition..." The etymology for coordination shows the Latin roots co- (a prefix for "joint") + ordinare, which means to arrange. Thus, for example, we say that in decorating one's living room one has achieved a lovely color coordination. One has arranged the colors in a pleasing manner. Similarly, looking with Coase’s eye, we see the manager-entrepreneur coordinate factors within the firm to achieve a pleasing outcome. Clearly these two example are not Schelling coordination. The colors did not coordinate themselves with one another, nor did the factors within the firm.

In somewhat of a paradox, then, we may say that, when Hayek spoke of coordination in economic systems, the dedicated opponent to any conscious effort to arrange society as a whole meant, in fact, pleasing arrangement. The arrangement is abstract, and the pleasure is allegorical, but that is what he meant. In the Hayek meaning, the concatenation of affairs in cases like the modern economy is not actually coordinated by a Great Arranger, but, as Smith’s famous metaphor demonstrates, their idea of coordination is clarified by an allegory of the affairs being "led by an invisible hand."

The allegory goes as follows: There is a superior being named Joy who is invisible and who beholds the vast economic order. We cannot spell out what she values for society and hopes to witness, but it is not hard for us to understand. In her humanitarianism she is basically like you and me, a genuine liberal, in the broad sense. Her pleasure increases when human society exhibits widespread prosperity, comfort, personal fulfillment, excellence, irony, and affection. In this regard she is like John Stuart Mill or Isaiah Berlin or Hayek or Schelling. In the road game of Figure 1 she prefers the (Right, Right) outcome, and in that sense the activities at (Right, Right) are better coordinated than the activities at (Left, Left). In the allegorical sense in which Joy exists within us and acts by mysteriously stirring our doings, Joy coordinates our doings in achieving (Right, Right), the way we coordinate colors in decorating our home. This is the allegory behind the meaning of "coordination" from the transitive verb.

Hayek's claim is that the decentralized activity of the free economy generates a dynamic, on-going "spontaneous order" which Joy finds more pleasing than the order generated by the centrally-planned economic system. The order of the market economy is like the naturally formed crystal, where microscopic local conditions lead each element to settle into its place. Joy's pleasure would be analogous to our regarding this crystal to be more pleasing than a object fabricated, molecule by molecule, in a laboratory. Because the order is abstract and its beauty is metaphorical, and because it encompasses all of the particular plans and activities of the individuals within that order, coordination in Hayek's sense might be called metacoordination. Figure 2 draws the distinction between the two coordinations.



Interaction that is agreeable to the interactors

Manifest from the interactor’s point of view

(From the intransitive verb)


Arrangement of elements that is pleasing to an external viewer

Abstract from the interactor’s point of view ("invisible hand")

(From the transitive verb)

Figure 2: Two Concepts of Coordination


The distinction between coordination and metacoordination helps us understand why there have been communication breakdowns in intellectual debates over planning. When Hayekians declare that "the very complexity of the division of labor makes competition the only method by which co-ordination can be adequately brought about" (see p. 48), they mean metacoordination. Only the free-enterprise system can generate a pleasing arrangement. But when "coordination" is read in the Schelling sense, as a sort of teamwork to achieve a common goal, Hayek's words become wrong. A large complex system probably needs central direction or leadership to achieve Schelling coordination. A small group of musicians might sit down and spontaneously make pleasant music, but a large orchestra will certainly need a common sheet of music. Imagine the symphony performance of decentralized, competing musicians! I believe that Hayekian claims about the coordinating properties of the market system have often been misunderstood because the word "coordination" is commonly taken to mean Schelling coordination. (The distinction between the two coordinations is explored further in Klein 1997.)

It is an error to read Hayek’s "coordination" as Schelling coordination. And related to this error is another: thinking that Hayek’s proposal excludes conscious planning for Schelling coordination.


As mentioned previously, urban or transportation planners often defend government planning of the urban transit system on the grounds that the system is too complex to be coordinated piecemeal by decentralized interaction. An ancillary goal of this paper is to urge planners to better understand the lineage of such notions: "We were the first to assert that the more complicated the forms assumed by civilization, the more restricted the freedom of the individual must become" (Benito Mussolini, quoted in Hayek 1944, 43).

Let us go back to the electronics example. Components are made in Korea, assembled into tape recorders in China, shipped to Long Beach, California, and loaded onto trucks for delivery to distributors throughout the American West. The coordination problems here are rather incidental. One of the simplifying features of this example is that tape recorders are not particular about the whens and wheres of the process. They are inanimate objects which will sit for days in dark, stuffy containers without minding a bit.

In urban transit, passengers are numerous, individual in their desires, and very particular about waiting. The problems of coordination are rather severe. Each passenger has his own preferred times and places to get on and off. Each day the individual's itinerary may differ or change on short notice. Vehicles usually follow schedules and routes to try to accommodate these desires. When making connections, passengers must coordinate with multiple vehicles, and the vehicles must coordinate with each other.

It is fair to say that a modern urban transit system, say in Los Angeles, achieves coordination. Generally speaking, the system has settled into a coordination equilibrium. People know when and where to catch the bus and where it will take them. From the point of view any particular bus rider, the actions of each of the parts of the system are satisfactory given what he himself is doing.

But it is no great praise to say that the system achieves coordination. The same may be said for prison life. The Hayekian challenge is as follows: When placed within Joy's broad view of society, is the current transit system conducive to metacoordination? An answer to this question must of course compare the metacoordination of one system to that of alternative systems.

Let us suppose that the governments of Los Angeles closed down all its transit services and declared a free competition policy for all bus, shuttle, and taxi services. Also, private entrepreneurs would be welcome to construct heavy or light rail lines, though it is unlikely that any would. All relevant levels of government sanctify this sudden transit tabula rasa.

Entrepreneurs both large and small would begin offering their services, just as entrepreneurs do in many cities today (sometimes even in defiance of law). We would expect the vehicles of most route-based services to be owner-operated vans, often operating under fleet brand-names or associations. The variations and peculiarities of transit markets are many, and the multiplicity of vehicles, modes, and service options are impossible to predict, especially in a free-enterprise context. I will posit some general features of what might take place.

First consider door-to-door services. Taxis, shared-ride taxis, carpools, van pools, and subscription commuter shuttles would compete in the open market. The parties involved would coordinate directly. Many services would use fancy dispatching or external display boards to aid on-the-spot coordination.

Then there is line-haul service on busy boulevards. One might envision a fairly steady flow of vehicles plying the boulevard, perhaps according to a fixed scheduled, perhaps not. Finally, for secondary routes off the main boulevard or in the suburbs, let us imagine scheduled fixed-route service, every 45 minutes or so.


Can we expect smooth coordination and felicitous metacoordination from such a picture? The door-to-door services would seem to pose no particular problem, but the line-haul and fixed-route services may experience trouble. Scholars have raised a number of concerns about the performance of free competition in transportation services. I will review them here.

One line of attack emphasizes poor consumer information about contending service providers. There are peculiar difficulties of price competition in the transit industry. Many riders are non-repeat customers traveling from airports, hotels, and resorts; non-repeat customers are poorly informed and vulnerable to others. In communicating the fare, there is ambiguity about whether to express the charge per mile or for the complete trip. And either alternative might entail further ambiguities. There is an awkwardness in "shopping around," since the communication often takes place within the vehicle and causes delays for other passengers (see Frankena and Pautler 1986 and comments by Robert Samuels). These problems might help to explain why there has been surprisingly little price competition in deregulated bus and taxi markets (Frankena and Pautler 1986, 3; Dodgson and Katsoulacos 1991; White 1995, 198). These problems also apply to some extent to competition in quality characteristics. Furthermore, there is the problem of trustworthiness, and incidents of "rip-offs" and crime sometimes occur in taxi markets. Because of the abnormalities of consumer information, there is an argument for alleviating the uncertainties and anxieties by having regulators control entry and set uniform prices.

A second line of attack on free-market transit is the argument from economies of density. Although it is agreed that bus service does not show economies of scale in production (Viton 1981; Hensher 1988; Shipe 1992), there are nonetheless systemwide gains from increased volumes. Part of the gains may come in the form of lower production costs, due to larger vehicles, but part accrues to riders in the form of higher frequencies, shorter waiting times (Mohring 1972), and a denser route structure (Gwilliam et al 1985). Christopher Nash (1988, 118) argues that the free-market process of "piecemeal infilling of gaps" will not successfully achieve economies of density because some of the benefits flowing from volume-enhancing actions accrue beyond the calculus of piecemeal operators; they neglect consumer surpluses and other benefits that accrue in other pieces of the system. Due to density externalities, the incentives that advance Hayekian metacoordination are not functioning properly.

Another criticism maintains that piecemeal operators in a free market will inevitably be disjointed. They will fail to coordinate schedules and to achieve smooth through-ticketing and interchange. This is a problem of Schelling coordination. Riders will be frustrated in connecting the pieces of their journey, and will have to make a separate transaction for each piece. Nash (1988, 114) argues that again there are systemwide benefits from through-ticketing schemes that the piecemeal operator would ignore. Nash combines this coordination argument and the density argument to make a case for transit "integration," or central planning.

Another issue is the provision of passenger facilities, like benches, shelters, stations, and signage, which are an important complement to transit services. When carriers operate under laissez-faire, local authorities might have difficulty coordinating the provision of these facilities. The operators might lack an impartial representative to work with the local authorities, and the laissez-faire market might itself be in constant flux. Waiting passengers might begin to congregate at inappropriate locations, blocking sidewalks, driveways, or storefronts.

Another concern is that of "cut-throat competition," an idea originally developed in the context of railroads and public utilities (Keeler 1983, 22, 47). The argument maintains that in an industry with high fixed cost and low marginal cost, competition may drive firms to cut prices to such low levels that costs cannot be recouped. The argument is like the natural monopoly argument, except that there is no premise that the optimal number of firms, in a blackboard sense, is one. Bus service does not display the economies of scale associated with natural monopoly. Nonetheless, the cut-throat competition notion may be relevant on individual routes, or on a systemwide basis once the total costs of establishing schedules, consumer information, and public awareness are included (Savage 1986; Nash 1988, 112).

The storyline of the cut-throat competition argument is indefinite. Suppose Company A sets up a bus system. Perhaps there is call, in a blackboard sense, for a second firm. Company B enters, but the tendency toward price cutting is too strong, and both firms are ruined. This scenario conforms to Marx's words about "periodical convulsions" and "the most outrageous squandering of ... the social means of production." In reviewing bus service in Britain, Peter White (1995, 206) speaks of "the instability and wasteful duplication found in deregulated areas" (although price cutting has not been common).

Variations on this story of cut-throat competition are, first, that Company B is smart enough not to enter, in which case Company A enjoys an unrestricted monopoly. Since it is free to revise its price downward in the event of entry, there in not much discipline exerted by "contestability," or hit-and-run entry. Another variation is that Company B enters and the firms recognize that there is neither profit nor sport in cut-throat competition, and manage to collude. In these cases, we get prices well above marginal cost and a highly inefficient contraction of ridership. Indeed, foes of free-market transit often argue that urban transit ought to charge very low prices and receive subsidies.

Then there is a final fateful argument against unrestricted competition: interloping. A company may take pains to establish some viable bus routes, but then interlopers in banged-up old vans -- that is, competitors! -- come around and collect the waiting passengers just before the scheduled service is due to arrive (Eckert and Hilton 1972; Roth and Wynne 1982). This will upset coordination in that the scheduled vehicle is harmed by the interloper activity, and, if such activity forces the scheduled service to give up the route, passengers for a time may suffer discoordination by waiting for a bus that never arrives. Entrepreneurs might know that if they were to attempt to set up a bus route, the interlopers would only descend to "skim the cream" and ultimately destroy what had been created. In consequence, no one sets up a service, no one interlopes, and no one waits to be picked up. This would be a coordination equilibrium, but obviously a poor result in terms of metacoordination. We can also imagine competing van drivers battling for customers on the line-haul routes, driving dangerously and becoming agitated (Grava 1980, 286). There might be ugly incidents such as fist-fights at the curb. Perhaps hot-tempered van drivers would from time to time run down a pedestrian.

Having reviewed several arguments against free-market transit, we can see why such a regime is often rejected by urban transportation planners. It is particularly easy to reject Hayek's philosophy when the word "coordination" is read to mean Schelling coordination. Urban planners can make a plausible case that free competition will not result in a smooth fulfillment of plans. As for metacoordination, they can well argue that Hayek's apparent prescription will be untenable because of poor consumer information and services, suboptimal route structures, disjointed pieces, destructive competition and interloping. On this ground transportation planners opt for centralized integration, "taking [urban transit] under their own control and putting an end to the constant anarchy ... of capitalist production" (Marx 1871, 213).


It might be said that the Hayekian prescription is not very robust. In a case like urban transit where coordination, in the Schelling sense, is fragile and complex, free competition may be highly imperfect and perhaps undesirable. A Hayekian faith would tend to make one believe that wherever there is discoordination there is an opportunity for an entrepreneur to step in and make a profit by resolving the discoordination, improving metacoordination in the process. In urban transit, where information problems and network effects complicate every action, and where interlopers lies waiting to skim the cream, this logic simply may not hold.

The pitfalls of free-market transportation are accentuated by Joseph DeSalvo in an article entitled, "The Economic Rationale for Tranportation Planning:"

This faith in the free market has existed at least since the time of Adam Smith who used the term ‘invisible hand’ to describe its workings. It is only recently, however, that the ‘invisible hand’ theorem has been rigorously proved and the conditions under which the theorem holds spelled out carefully [i.e., general competitive equilibrium] . To the extent those conditions are not fulfilled in practice, the case against planning is much weakened, for decentralized decisionmaking cannot achieve desired economic goals when the conditions are violated. Some other method is then required. (DeSalvo 1973, 22-23)

I have posited a "free competition" policy and some of its likely results, but is such a regime necessarily what Hayek would favor? Is Hayek instructing us to choose policy to mimic the conditions referred to by DeSalvo? One of Hayek's chief missions as an economist was in fact to wean economists away from equilibrium models and technical categories as ways of describing economic affairs. Those who would drape the ideas of Hayek and Adam Smith in a rarified notion of pure competition make a mistake much like that of Lange when he sought to mimic a free economy by mimicking the rarified models of perfect competition.

Economists are trained to think in terms of neatly characterized settings which they call "markets." Numerous traders buy and sell at equilibrium prices. They transact speechlessly. The canon comes from Walrasian general equilibrium and perfect competition. A rich variety of models of market imperfection also are instilled in the budding economist, but they too lead him to think of the economy as atomized action within a set of neatly characterized procedures. Because the procedures are fixed, there is no role for private actors to engage in conscious planning for Schelling coordination.

But in real life, deals are embedded in particularistic human contexts, and the money price may be only one part of the terms imposed on the "buyer." Commerce and industry in real life are a skein of negotiated and particularistic contracts, as well as informal and implicit relationships. This view is what Hayek has in mind when he writes of the free competitive economy:

It involves competition between organized and unorganized groups no less than competition between individuals. ... The endeavor to achieve certain results by co-operation and organization is as much a part of competition as individual effort. Successful group relations also prove their effectiveness in competition among groups organized in different ways (Hayek 1960, 37; see also 1988, 37; 1944, 42).

The emphasis that Mises and Hayek place on local knowledge is not merely a recognition of the free market's function to distill dispersed knowledge into a price vector, in a manner like the "Big Board" (the New York Stock Exchange). They also recognize the importance of flexibility in private contract, to sculpt private arrangements to fit the particulars, to cope with change, and to coordinate with others. Although Hayek coordination is distinct from Schelling coordination, its process is not apart from Schelling coordination. The process includes the practice of voluntary planning, by consent and contract, to achieve Schelling coordination. Hayek (1973, 46) says, "[t]he family, the farm, the firm, the corporation and the various associations, and all the public institutions including government, are organizations which in turn are integrated into a more comprehensive spontaneous order [or metacoordination]." (2)

This latter theme is prominent in the work of Ronald Coase (1937) and the law-and-economics tradition (to which Hayek 1988 pays tribute). In caricature, the firm is an island of planning and the market is like the Big Board. Yet Coasian researchers have done much to dissolve the distinction between "firm" and "market." All capitalist activities are contractual relations, and involve elements of both jealous conflict and mutual planning. Armen Alchian (1969) and Harold Demsetz (1972) write of the competitive labor market within the firm. Other Coasians like Steven Cheung (1983) and Paul Rubin (1978) write of contractual relations making up an abstract and invisible firm within the market. It is the process of "truck, barter, and exchange," not just speechless purchase, which was said by Adam Smith (1776, 13-16) to be guided by an invisible hand.

The cooperative and malleable nature of private agreement eluded Karl Marx. He said: "Division of labor in the interior of society, and that in the interior of a workshop, differ not only in degree, but also in kind" (1867, 354). The Coasians tell us rightly that it is only a difference in degree. Marx saw a need to "regulate production" and looked for a solution in "united cooperative societies." But he would reject the nexus of private agreement, or voluntary planning, as a basis for such cooperative societies, because he was unable (or unwilling) to view "commodity" exchange as a process of cooperation between trading partners, and as a process of sportsmanship among competitors. As Mises (1949, 335) puts it, the market process is consummated by all members of society "[c]ompeting in cooperation and cooperating in competition."

Hayek's real message, which found rich elaboration in his later works, was the advancement of a legal order of private property and freedom of contract -- not of "competition." With this understanding of Hayek's prescription, we might take a different view of the transit scenario we have presented. The coordination problems due to information problems, poor passenger facilities, network effects, destructive competition and interloping may be described, not as the failures of free competition, but as failures arising from that part of the system that remains socialistic. The problem is that the Hayekian prescription has not really been adopted.


Imagine visiting a place that is just like Disneyland except for one thing: interloping food vendors were perfectly free to enter and roam the grounds. In this case we might imagine some problems of "free competition" similar to those for urban transit. If a legitimate entrepreneur were to lease space on the grounds and set up a large-scale restaurant selling barbecue ribs, the cascade of interlopers would strategically position their carts and wagons, perhaps also offering barbecue ribs, along the walkways leading to the entrepreneur's restaurant. In the face of the uncertainty about being able to appropriate the value of his investment, the entrepreneur might shrink from investing altogether. At the real Disneyland, we know, such "free competition" is not tolerated. Only a limited number of authorized concessionaires are permitted to operate, and according to contractual terms. These restrictions on competition are not, however, an example of intervention or socialism. They are practices of the free private-enterprise system itself. As in the case of a shopping mall or proprietary community, the entire arrangement exists within the ambit of private property and private contract. (3)

Just as we do not observe interloping problems at Disneyland, we do not find interloping problems at warehouses or private distribution centers. If thieves -- interlopers! -- were to descend on the distribution center and steal stereo equipment from the containers or warehouses, the private parties involved would be anxious to find a remedy. The distribution center employs security guards and the like, because it recognizes that otherwise shippers will take their business elsewhere. Like the concept of litter, the concept of interloping seems to be predicated on the existence of a public commons.

In American cities today the sidewalks, passenger shelters, curbs, streets, roads, and highways are a public commons. Access is free and husbandry is fragmentary, clumsy, and lackluster. There is no one with both the flexibility and authority to manage the resource and motivation to do so. There is no private owner. The authority to take action would depend on the concerted action of several inflexible and inert public offices.

The Hayekian proposal for urban transit would be to bring the problem fully within the ambit of private property and freedom of contract. That means privatization of the sidewalks, shelters, streets, and highways. Private ownership of the streets would mean the existence of a party that has the ability and motivation to deal with information problems, passenger facilities, network effects, disjointed pieces, destructive competition, interlopers, and curb-side conflicts. (4)

Hayek’s message has often been misunderstood by economists -- especially ones steeped in model building. Christopher Nash, a supporter of transit planning, says: "Thus the argument over public transport integration really is the traditional one of central planning versus the market" (p. 99). Yet Nash’s examination of these two regimes in transit is confined to equilibrium conditions within a rarified model. He compares (benevolent) central planning and atomistic private operators who pursue profits. Both regimes enjoy omniscience! The atomistic regime is characterized as "the market." Yet the private competition examined still takes place on socialized sidewalks, busstops, curb zones, and streets. Nash misconceives the traditional debate over central planning versus the market. He associates "the market" with rarified economic concepts that leave no scope for private, voluntary planning. Yet one ought to read "the market" to mean a set of legal rules (namely, a set giving much weight to private property and freedom of contract), and one should recognize that men and women acting within this legal framework organize competing pockets of conscious planning.


Owners tend to be mindful of the satisfaction of patrons, and visitors tend to be mindful of the norms and expectations of their hosts. Current practice at hotels gives us a clue as to what to expect. The hotel operates its own little transit station where cabs, shuttle vans, and gratis hotel minibuses constantly pick up and let off passengers. The hotel enters into agreements with certain carrier companies or associations, and permits only those to take passengers. Contractual relations and private property guard against "interloping" -- or trespassing. Privately established procedures and reputational incentives work against disorderly conduct at the hotel drive-up.

Imagine the city streets and roads divided up into segments or small districts. Each separate unit would be under the control and management of a private entity. We can begin to think of the entire city as a continuous patchwork of shopping-mall roads and hotel drive-ups. Just as shopping malls allow free parking, street owners might make road access one of the gratis attractions to visitors, residents and businesses. Just as proprietary communities often provide minibus service gratis, the road-owner might provide free bus service. Alternatively, the road-owners might implement electronic road pricing.

If the owner of a piece of road were insane, he could foul things up in his neighborhood and beyond. He could write his street names in ancient Sanskrit. He could program the traffic lights to be green in all directions. He could refuse to participate in a regional billing service for electronic toll collection, and instead make every car stop and pay a toll. He might invite a bus company to establish a route and then encourage interlopers to steal the customers.

But very few road-owners would be insane, and few of those who were would also be wealthy enough to carry on for long in such a manner. The natural incentive is for the road owner to work with associations and agents that coordinate the interdependent parts of the road and transit system. In private industry, such standards for matters of technology, product design, product safety, and insurance emerge from voluntary machinations -- both competitive and cooperative. We could expect the same for transit coordination. The natural incentive is for the road-owner to form contracts that will enhance his road as a place to shop, work, and reside.

Road-owners might permit only certain transit operators to serve their road, and only at properly designated places. These services would span numerous private districts. The road-owners would jointly form their own association to confer over matters of common interest, such as security, sanitation, special events, and so on. The association would be an institution to reduce the transaction costs of coordinating collective action that spans several districts. It might happen that the owner of a particular piece of road would try to hold out for special terms in a transit arrangement, analogous to a holdout in a highway development project, but the road-owner would be engaged in extended, repeated dealings with adjoining road-owners, and most likely such behavior would be checked by norms against demanding special treatment for oneself (Ellickson 1991). Reputation and norms are part of the glue of private agreement, and all are part of the voluntary process of metacoordination.

It may be contended that a road-owners’ association is a re-creation of local government, and in many respects that is right. Yet in the case of actual municipal government, many types of service are bundled together over a very large geographic area. Choice and competition within the geographic unit has been supplanted by "the democratic process." Residents and businesses cannot exit the bundle except by departing the city altogether. The bundling of many services -- libraries, museums, schools, parks, athletic fields, conference centers, hospitals, water, sanitation, power, homeless shelters, fire protection, security, streets, and transportation -- all carried out by large municipal governments -- might well reflect past conditions of technology and mobility, path-dependent government, and public-choice forces, rather than limitations of voluntary action, whether commercial, mutual, or charitable.

In the case of proprietary governance, services would tend to be broken down into separate and independent offerings, based on smaller geographic units. A private road which belonged to an association of roads could simply discontinue its participation in the association. If the association failed to satisfy its members, some would pull out and perhaps form a new, competing association. Like simply selling off one's shares in a declining corporation, this exit option generates powerful incentives to keep up performance. Proprietary governance would tend to de-bundle services, expand the number of nearby alternatives, and refine the variety of final packages one could create for oneself. Relatively easy exit by residents and businesses would discipline road-owners, and easy exit by road-owners would discipline associations, agents, and service providers (Hayek 1960, 351f). These considerations point in the direction of James Buchanan's rarified "club" model (1965), in which government is best left to the market. The historian David Beito (1990) shows how nongovernmental planning built the private residential streets (known as "Places") of St. Louis, with complete infrastructure services. The economist Fred Foldvary (1994) presents numerous case studies and argues that private "government" delivers the goods (MacCallum 1970). Let me be clear in saying, however, that even in my preferred semantics, there are gray, ambiguous regions between local, coercive government and private, voluntary agreement.

The role of competition in proprietary governance certainly falls short of the economist’s notion of perfect competition, but it will be much more prominent than it is in the case of municipal government. The debundling of social services and the reduction of geographic size would make it easier for residents and businesses to shop with their feet. Road-owners would have to compete with other roads and districts. And they would be led to utilize competition themselves to improve service and reduce cost. If transit services are granted on exclusive contracts, the road-owners would naturally invite competitive bids for the contract. Also, road-owners might permit multiple, competing carriers to operate on their roads, but manage the particulars of that process.

A Hayekian will readily admit that certain restrictions are probably necessary. The one obviously necessary limitation on real-property rights is that road owners must let others cross their road. This limitation has historically been placed on railroads, private toll roads, gas and oil pipelines and so on (Tullock 1993). Without such a limitation, road owners could prevent "trespass" by those wishing merely to cross their road. They could enclose or cut-off vast areas and extract outrageous payment just for crossing, bridging over, or tunnelling under the road. The road owners surrounding the residence of Bill Gates would be capable of extracting his millions. The obvious solution is easements that permit free crossing at a sufficient number of locations. In similar fashion, it might be that limitations on real-property rights would be necessary to cope with the lately mentioned hold-out problem, and perhaps for natural monopoly problems (Coase [1960], 155; Tullock 1993).

We may now revisit Christopher Nash's criticism (1988) of free-market urban transit. He says that piecemeal operators will not take into account systemwide benefits, in particular consumer surpluses arising from density economies and smooth interchange. Once we put road-owners into the equation, however, we can see how they may be attentive to the consumers’ demand for frequent and reliable service and smooth transfers. In fact, the road-owners might be transit consumers, in that roads might be owned in joint-property arrangements by residents. With private, competitive road-owners now part of the process, we can see that the decision- making process may not be terribly piecemeal at all. Rather than thinking of small transit operators roaming independently like myopic termites, we must think of transit within a responsive body of contract and private agreement, a nexus of voluntary planning between different road-owners and service providers.

The workings of a proprietary metropolis are impossible to foretell. The contracts that are agreed to at any point in time may permit wide latitude in the action of piecemeal transit providers. But what is especially frustrating to researchers who have a strong will to know is that the agreed contracts themselves -- the rules of the transit game -- too are evolving and somewhat piecemeal. They too are, as the model-builders put it, "endogenous." Pretending to model this system would bound to be highly misleading. Hayek (1988, 62) says that "the most important task of science might be to discover ... [the] limits to our knowledge or reason."

Yet we may nonetheless invoke the general principle that each part of the proprietary system strives for a more profitable local coordination, and in the process advances metacoordination. Freedom of contract gives authority and great flexibility in managing resources, and private ownership gives great motivation; together they make for a system that evokes and prospers the activities, practices, and institutions that bring joy, and weeds out those that don’t. These claims may sound to some like hackneyed precepts, but economic scholarship bears out their depth and power. There are no guarantees here, but it seems foolhardy to me to suppose that we could expect better from "the democratic process" and government officials, even ones with Ph.D.s in civil engineering or urban planning (or economics). (5)


Since we cannot expect desocialization of the roads any time soon, let us briefly ask: Could we hope to see local government manage the streets in a manner similar to our optimistic picture of proprietary governance? The local government would still be bound to face the rigidities and lack of incentives which prevent it from capitalizing on local opportunity, but we might encourage them to do the best they can, and to encourage a decentralization of such competing efforts. Thus we might develop a reform proposal of deregulation and privatization, and the devolution of full authority over sevice registration, insurance requirements, and curb rights to local government authorities. The local authorities would need to hammer out a system which essentially defined property rights in waiting passengers, and which saw to it that those rights were respected. Adrian Moore, Binyam Reja and I have put forth a proposal for local governments to establish and enforce a system of curb rights appropriate to local conditions, aimed at remedying many of the problems arising from the street/curb/sidewalk being a commons (Klein, Moore, and Reja 1997). The authorities might also need to facilitate the information flow between consumers and carriers, and they would still need to provide passenger facilities like benches, shelters, and stations on public property.


The essential points of the Austrian critique of government planning are that the economic terrain must always consist of conditions that are highly particularistic and constantly changing, and that an effective working of the economic system needs to be taking these conditions into account. Knowledge of these conditions exists only in the minds of the dispersed individuals of the system. Thus the best way to utilize knowledge of the particulars is to let individuals respond flexibly to opportunity as they discover it (Kirzner 1985, chap. 6).

The issue, says Hayek (1945, 79), is not whether to have planning, but "whether planning is to be done centrally . . . or is to be divided among many individuals." Urban and transportation planners will agree that as planning becomes more centralized, "particular knowledge of local circumstances will, of necessity, be less effectively used" (Hayek 1960, 352). Some researchers have used this insight to make the case for decentralization of government authority (Chisholm 1989). Here I have tried to suggest that Hayek’s notion of decentralized planning is essentially a proposal for a set of legal rules that give much weight to private property and freedom of contract. As Walter Block (1979) has argued, the plan of government action that would best induce the utilization of local knowledge is a plan to privatize the urban landscape and to enforce the contracts of private parties, although a few very basic limitations on the rights of real property probably would be in order.

The invisible hand is without central planning, but not without planning. It moves by a web of voluntary planning. Because the web is voluntary, its elements must appeal to the people involved. Except in the case of systematic externalities like air pollution, the principles of property and contract generate incentives to bring the particularistic parts into an abstract order which can be said to be "metacoordinating." Voluntary planning is usually better informed, more responsive, more intelligent, and more humane than government planning.

There is a distinction between metacoordination and coordination, but no process of metacoordination is without pockets of coordination. If Hayek's idea of coordination is thought of as Schelling coordination, Hayek will be misunderstood. Yet, if Hayek's process of metacoordination is thought of as being apart from planning efforts to achieve Schelling coordination, and is taken to be only speechless, atomistic market purchase (textbook perfect competition), again Hayek will be misunderstood.

In 1909, when the Liberal Party in Britain was undergoing its momentous transformation, Cabinet minister Winston Churchill wrote: "The ever growing complications of civilization create for us new services which have to be undertaken by the State, and create for us an expansion of the existing services" (quoted in Greenleaf 1983, 27). It is often thought that urban transit is too complex to be left to the invisible hand and that the invisible hand would only create problems. Yet Hayek’s line of thinking may lead one to the conclusion that the problems really lie in the fact that the invisible hand has not had proper scope to function.




The author thanks Linda Cohen, Tyler Cowen, G. J. Fielding, Pia Koskenoja, Charles Lave, Titus Levi, Adrian Moore, James Nolan, Robert Noland, and Ben Reja, and Stergios Skaperdas, Ken Small, and Alex Tabarrok for helpful comments and discussions. For financial support the author thanks the California Department of Transportation and the University of California Transportation Center.


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1. Notably, E. F. M. Durbin, H. D. Dickinson, and Abba Lerner. I am drawing on Don Lavoie's study of the debate (1985A). My quotations of Marx and Bukharin are borrowed from his work.

2. Elsewhere Hayek ([1946], 23) stresses that the philosophy he favors "affirms the value of the family and all the common efforts of the small community and group, . . . believes in local autonomy and voluntary associations, and . . . indeed its case rests largely on the contention that much for which the coercive action of the state is usually invoked can be done better by voluntary collaboration."

3. Diandas and Roth (1995) make the same point about urban transit using the example of shopping centers preventing unauthorized traders to set up stands on the walkways.

4. Hayek never declared that all roads and streets should be privatized. He says that certain amenities cannot be provided by market mechanisms, including "most roads (except some long-distance highways where tolls can be charged)" (Hayek 1979, 44). He says that market provision may be "technically impossible, or would be prohibitively costly." I wish to make four remarks. First, Hayek does not conclude that such amenities must be provided by government; he goes on to speak of the vitality and rich history of the "independent sector," which has provided amenities by voluntary, nonmarket, methods (pp. 49-51). Second, Hayek warns against the dangers of the government regulating "so-called public places," such as the "department store, sports ground or general purpose building," which are provided by private initiative (p. 48). Third, even when amenities ought to be provided by government, he favors provision by local and competing government (p. 45). Fourth, he explicitly notes the dependence of these matters on technology (p. 47). There is good reason to believe that as powerful new technologies have become available, such as electronic toll collection, computerized payment methods, video monitoring, in-vehicle parking meters, and the remote sensing of auto emissions, Hayek would be increasingly supportive of road privatization.

5. On whether government is really more democratic than "the market," see Richardson and Gordon (1993).


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