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Why Planning Vs. Markets Is An Oxymoron:
Asking The Right Question

by E. R. Alexander
Emeritus Professor of Urban Planning
University of Wisconsin-Milwaukee, Milwaukee, WI, 53211


Planning vs. markets is a fallacy, based on obsolete economics. Comparing their merits is the wrong question: in theory and reality it is impossible to separate them. Transaction cost theory shows the error of the link between planning and "public" that is behind the "planning/market" dichotomy: there is also planning in, for, and of markets. The right question is: What governance is appropriate, from hierarchical organization and its associated planning, through various forms of modified markets, to the rare "perfect" market that has no planning and needs none. Analysis of some Planning & Markets papers shows how this approach could improve them.


    I. Introduction: Planning Versus Markets

    II. Transaction Costs And Planning

    III. A Transaction Cost Theory Of Land-Use Planning And Development Control

    IV. Asking The Right Question



I. Introduction: Planning Versus Markets

"Planning and Markets is devoted to the study of planned interventions versus market approaches."
Planning and Markets title page

If P&M's editorial policy were consistent with its name, it would deserve an unqualified welcome. But its juxtaposition of planning and markets is based on obsolete economics and does a disservice to its contributors and readers. "(P)lanned interventions versus market approaches" (1) implies that planning and markets are separate, opposed, and mutually exclusive. As I will show below, this is incorrect.

Perhaps this error would not be a problem, if it were not the framework for soliciting, reviewing and selecting papers for the journal, and structuring their authors' conceptual and analytic contributions. The journal's basic question: "comparing the merits of planned interventions and market solutions", means evaluating, in the context of a particular policy issue or problem, whether "planning" or "markets" are more effective.

But (except in extreme cases (2) ) "planning" and "markets" are not analytically or empirically distinguishable. The false dichotomy between them is based on a widely held association between planning and public intervention and governmental or state regulation and action, as opposed to private enterprise in the supposedly unplanned market. Institutional economics has modified the simplistic assumptions of classic economics to reveal the fallacy of this dichotomy: planning is not limited to the public sector, nor do markets exclude planning.

In equating planning with public intervention, P&M makes a common definitional error (3). In the sense in which it is commonly understood, planning is any activity involving making a plan: "to (some)thing to be constructed... something to be done or some action to be carried out; to scheme, project, arrange beforehand." (OED, 1971: II P-Z 941). A narrower definition of planning in its collective sense is more useful for us here, viewing planning as the deliberate social or organizational activity of developing and deciding upon strategies for future action (4).

There is planning in markets (5), e.g. corporate strategic planning, planning of markets, e.g. "artificial" markets, and planning for markets, e.g. policies and institutions like the SEC to regulate the New York Stock Exchange. There are also markets in the public sector: political markets (such as logrolling in legislatures), quasi-market arenas for economic exchanges, such as tradable emission rights and auctions of telecommunications transmission frequencies, and interagency resource exchanges as in Britain's National Health Service.

If planning and markets cannot be separated, it follows that comparing their effectiveness is asking the wrong question. A better question emerges, I suggest, when, rather than juxtaposing planning and markets, both are subsumed under the more overarching concept of governance. Then the question is no longer "to plan or not to plan", but: What is the most effective form (or mix of forms) of governance? Asking this question in the historical sense (i.e. in an ex post evaluation) we are undertaking institutional analysis; raising it in the context of addressing a policy issue or problem we are doing institutional design (Alexander, 1995: 51-52; Bolan, 2000; Salet, 2000: 16-21).

Below, I will suggest that an integrated transaction cost theory (TCT) derived from transaction cost economics, offers a useful approach and set of analytical tools to address this question. My argument begins with a summary presentation of TCT leading into a "Transaction Cost Theory of Planning" that shows the fallacy of juxtaposing "planning" and "markets". I illustrate the importance of asking the right question, demonstrating its institutional analysis and design potential with an application to governance of the land development and property market. Finally, a critical review of some sample P&M articles will suggest how they could be improved if they had only asked the right question.

II. Transaction Costs And Planning (6)

Conventional explanations of planning in welfare economic terms explicitly or implicitly associate planning with government intervention and state action, juxtaposing the (planned) public sector with the "free" market. Other discussions of planning and markets reveal the same dichotomy, contrasting "market-" and "plan-rationality" or comparing synoptic planning to an incremental political market.

But more advanced theory and observation suggest that this dichotomy is no longer correct, and if it was it has outlived its usefulness. Many definitions of planning (e.g. as rational choice, as anticipatory coordination, or as the attempt to control future actions) are so general (perhaps too universal) as to transcend this dichotomy. Political economists have been debating the respective merits of markets and various alternative forms of organization, and in the policy arena exploration of organizational structures and service delivery systems has ranged from markets through various mixed forms to pure bureaucracies.

Increasing complexity has also blurred the boundary between the elements of the original duality: the public sector and the market. Partial privatization and "third party governance" (Palumbo, 1987: 97-99) have diluted the public sector, which is no longer the exclusive domain of sovereign state agencies (if it ever was). Defense illustrates the interdependence and interaction between the public and private sectors, as arms manufacture and procurement exhibit various types of integration between government and private corporations in different countries and over time, consistent with their cultures and circumstances.

In the U.S. a complex symbiosis has emerged between the Pentagon and major defense contractors. This combines formal separation in market-like contracts and competitive procurement with the actual close cooperation necessitated by the imperatives of technical expertise supported by the continuities of personal and institutional relationships. Other countries, like France, openly recognize this interdependency, with government a major shareholder in defense industries. Elsewhere, again (e.g. in Brazil and Israel) national arms industries integrate R&D, production and procurement from private subcontractors. This example shows how artificial the public-private sector distinction is, even for national defense, surely a public good par excellence.

The private market, too, is rarely the "perfect" market beloved of classic economists, but has evolved into a variety of hybrid market forms, which include large integrated corporations with many of the attributes of (public) bureaucracies (Williamson, 1975). Consequently (as I will explain below), planning is not limited to the public sector. Firms and corporations plan their own activities, formally applied in corporate strategic planning (Lorange, 1982).

Private sector firms, as expert planners, also do most of the planning that is actually done today. They are the outsourced providers of governments' comprehensive forward land-use and development plans which back up their statutory planning and development control, and they do almost all the sectoral planning (7), e.g. for infrastructure and strategic facilities, land development and improvement, industrial production, and telecommunications. Planners, then, are as ubiquitous in the private sector as in government: they may be independent expert consultant firms, or they may be an in-house unit of sectoral private firms and corporations.

But the conventional rationale for planning, as a societal undertaking, has been based on the old public-market dichotomy. It has been associated with the basic functions of government, and explained in welfare-economic terms as public intervention in response to market failures. These include negative externalities (e.g. pollution), positive externalities demanding some public-private goods (e.g. education) and pure public goods that the market cannot supply (e.g. defense).

We find, however, that planning is not only a property of the public sector, but is widespread in the market as well. Should not an adequate theory be able to account for planning in a way that can explain planning in the market itself, and not only as something external or complementary to markets? The "Transaction cost theory of planning" does this, but first a brief introduction to integrated transaction cost theory (TCT) is necessary.

Transaction cost theory

Transaction cost economics was developed to explain economic institutions. Extended from the market into the public realm, an integrated transaction cost theory (TCT) can be applied to institutional analysis in the public sector. This has been done, for example, in reviewing the development of U.S. economic policy (Dixit, 1996) and in exploring alternative forms of governance for the U.S. State Department (Williamson, 1999).

Modifying classic economics to focus on transaction costs, TCT explains institutional adaptations of the perfect economic market. The basic unit of analysis is the transaction: any exchange between parties, from simple exchanges of goods and services for money, to other transactions involving the promise of action of value by one party in exchange for money, goods, services or other valued resources, or for the promise of reciprocal action of economic or other value. Though TCT originally focused on economic exchanges, it can now cover all transactions, in the public and private sectors and the political and economic markets alike.

In institutional analysis, TCT applies the principle of remediability, i.e. it compares alternative feasible forms of governance, rather than referring to some hypothetical ideal. TCT prescribes discriminating alignment: matching the transactions involved and their specific attributes, with alternative governance structures, to see which offers the lowest transaction costs for all participating actors. The counterpart of this analysis, fitting appropriate governance structures to a market's transactions and their characteristics, is institutional design.

Critical transaction attributes include interdependence (often focusing on, but not limited to, asset specificity), uncertainty (which may be the result of limited or asymmetric information), and duration: a transaction that is repetitive or extended over time. To the degree that a transaction has these characteristics, the actors may be exposed to various hazards: opportunism, e.g. one party to a contract exploiting the other's dependence or his own superior information; or moral hazard: an agent's accepting unwarranted risks that are divorced from responsibility, such as questionable bank loans in government guaranteed programs. In response to such hazards, transactions with various combinations of these transaction characteristics are associated with different forms of governance.

The completely independent transaction, a unique exchange with predictable results (like a simple purchase) is highly compatible with the perfect market. "Mixed" transactions, more interdependent, more uncertain or more ongoing, evoke market adaptations into hybrid forms of governance. These include voluntary arbitration, relational contracting (e.g. industrywide bargaining), and bilateral governance regulating markets; e.g. stock exchanges in the economic market, and campaign financing legislation in the political market. "Idiosyncratic" transactions, with high interdependence and asset specificity, uncertainty and information-impactedness, and which are repetitive or long lasting, stimulate the parties' integration into a single organization: the public bureau or the corporate firm.

A transaction cost theory of planning

In "perfect" markets, transactions are unplanned. This is true in both economic and political markets. The participants are all small, simple units: firms (as producers and consumers of goods and services and price setters), households and individuals (as suppliers of labor, consumers of economic and public goods and services, and voters), legislators, simple political units and unitary public agencies.

Decisions in these transactions are spontaneous in light of circumstances and available information, guided only by some basic deliberation and mutual adjustment. This is quite informal and may be largely intuitive, involving information processing and evaluating alternative courses of action in the light of possible contingencies. This is the kind and level of planning that goes into deciding upon and drafting a simple enforceable contract or agreement in the economic or public arenas.

Collective outcomes here are unplanned: they are the aggregations of all the individual decisions and spontaneous mutual adjustments in these political and economic markets. The perfect market, then, is associated with nonplanning. In the economic market, outcomes are the systemic results of free competition and supply and demand. In the political market, collective decisions emerge in an incremental process of partisan mutual adjustment.

Markets do not need planning to make collective decisions; organizations do. Single unitary organizations need strategic planning to articulate their objectives and design and evaluate future courses of action to meet possible contingencies. They also engage in routine advance planning of prospective operations, essentially a future extension of management.

Simple organizations can limit themselves to these kinds of planning. But few organizations are that simple. As they increase in scope, size, and complexity, hierarchical control becomes inadequate to identify and implement common purposes. Planning becomes more interactive, to bring the divergent objectives of different units into concert by creating agreed upon frames of reference for future decisions and actions.

This is coordinative planning (8). If a firm is not a mom-and-pop business, but a large corporation, it cannot set marketing objectives without consultation between its marketing and production divisions. Once a marketing strategy has been adopted, its implementation also needs planning, assigning to each unit - marketing, finance, production, franchisees - its essential tasks. Similarly, in contrast to a small town Public Works Department, a regional transportation agency needs coordinative planning to determine its traffic management strategy, and planning its execution in detail involves interaction with local governments, employers, and other interests.

Another aspect of coordinative planning, then, is devising strategies for deploying the relevant organizational units and ensuring the commitment of each to its assigned role. In this way we can recognize coordinative planning as the "missing link" between planning and implementation. Ultimately, such coordinative planning leads to organizational and institutional design.

As organizations grow and differentiate, the interdependence of internal and external stakeholders also increases, making the distinction between the organization and its environment ever more tenuous. At this scale, coordinative planning in an organization transmutes into coordinating interorganizational systems. Much of what we observe as planning is anticipatory coordination of this kind.

The global corporation's strategic planning is basically aimed at coordinating the strategies and operations of its subsidiaries, focusing on internalizing transactions that would be too costly if left to the market or devising artificial market frameworks for exchanges between subsidiary units. Economic transaction cost theory accounts for the emergence of large firms and complex corporations that are essentially interorganizational systems, and the consequent transformation of what classic economics envisaged as the simple "perfect" market. Here, then, is also an explanation for planning in the market.

In the same way, the local government's master plan is meant to be a framework for coordinating its own units' and its residents' and firms' investment and location decisions in a way the market cannot. A mandatory regulatory system usually supplements such plans. TCT offers a parsimonious explanation (perhaps not the only possible one) for why this quasi-hierarchical system of public agencies, households, firms, developers and other interests, and the planning that goes with it, have come into existence. This is presented in more detail below.

To summarize the transaction cost theory of planning:
  • Transaction costs, especially those involved in idiosyncratic transactions, are incentives for developing nonmarket linkages that generate hierarchical organizations and interorganizational systems.

  • Collective market outcomes, economic or political, are aggregations of multiple self-interested decisions and partisan adjustments through systemic market interactions: perfect markets do not need planning.

  • Planning, therefore, is part of the response to high market transaction costs, and is a property of nonmarket forms of organization. In particular, planning is associated with formal organization (9), which appears in various structures ranging from unitary hierarchical organizations to complex interorganizational systems.

  • These organizations exist in the public and private sectors alike, the consequence of market adaptations to minimize transaction costs. Since it is associated with organization, therefore, planning is not only government intervention in the market, but occurs in the market too.

In this way, TCT provides a theory refuting the "planning vs. market" dichotomy, which confirms empirical observation of private sector planning and of the vanishing public-private divide. The transaction theory of planning goes beyond conventional rationales for planning, to account for planning in the market as well as planning as public intervention.

III. A Transaction Cost Of Theory Of Land-Use Planning And Development Control (10)

Just as for generic planning, Pigouvian welfare economics has justified government intervention in what would otherwise be unregulated land and property markets. An alternative account draws on social choice theory. Institutional and transaction cost economics provide more parsimonious explanations, while TCT offers the added merit of applicability in institutional design.

Three traits give TCT its institutional design potential. One is its unit of analysis: the transaction, which is ubiquitous, concrete, and well defined. The second is its concept of remediableness, demanding comparison between feasible alternatives. The third is its main hypothesis: discriminating alignment, which prescribes testing the fit between transaction characteristics and alternative forms of governance. The most appropriate form (or mix) of governance is the one that minimizes all concerned parties' transaction costs.

Institutional economics and transaction cost theory (TCT) offer two ways to explain why public land use planning and development control exist and why they are so popular. These approaches represent different levels of analysis in a three-level schema of society. The micro-level, dealing with the individual, is outside TCT's concern. TCT focuses on the meso-level: forms of governance and their relative costs. The macro-level is the institutional environment, the domain of mainstream institutional economics.

Public land use planning and development control can be defined as "government delineation and/or restrictions of rights over land within certain spatial confines" (Lai, 1994: 77). In this sense, then, they are a significant part of the institutional environment of the land development process and the land and property markets. Public planning assigns and restricts land development rights, and development control intervenes in the processes of land development, construction, occupancy and use to enable and constrain transactions in accordance with prescribed rules.

Institutional economics modifies classical economic theory by introducing transaction costs, suggesting that these make the effective operation of markets impossible without some third-party enforcement of contractual commitments. Though voluntary institutions can be deployed (such as arbitration), these will ultimately also be confronted with the problem of enforcing compliance. A state administered institutional framework of third-party enforcement, therefore, is essential even for efficient impersonal exchange in the classic economic market, and the clear delineation of property rights is a critical precondition for markets to work at all.

Rights over land is a powerful case in point: the assignment of and control over land uses will generally reduce transaction costs (as discussed in more detail later) and can create or enlarge markets. But recognizing planning and development control as part of the market's institutional environment still leaves the question open: "Why public?" Is it not possible to substitute voluntary compliance and enforcement for parts or all of the regulatory institutions of governmental intervention in the land development process? This is a valid question, which gets different answers depending on the level of analysis.

A meta-level approach gives this question a negative answer, asserting that assigning property rights in land (which is what land use planning and its implementation through regulation and development control do) is a sovereign task. Sovereign tasks involve commands (laws, regulations, rules) that can only be issued and enforced by the state.

When it defines land use planning and development control as sovereign tasks, making them part of the market's institutional environment, institutional economics joins mainstream planning theory in acknowledging public planning as essentially a political activity. This combines with the quasi-judicial aspects of development control to confirm the public nature of land use planning and regulation.

The TCT approach, however, sees the question: Why public?" as open, to meso-level examination of the discriminating alignment between transaction attributes and alternative forms of governance. This section continues with a review of the land development process, analyzing the relevant transactions in the production and transformation of the built environment.

Land development and the real-estate market

A model of the basic relevant transactions and their parties follows. It is important to note that this model does not include planning and development control, or any other form of statutory or voluntary governance: they are contingent, not necessary parts of the process. This description of the land development process is at a level of abstraction that fits any society with the general characteristics of a market economy (11).

But this also means that for practical application in institutional analysis or design, this model needs adaptation to the particular context concerned. These modifications will include the particular forms of governance and the actual institutional framework of current land development and the property market there, which of course vary widely from place to place (12). The generic model includes the following transactions and parties:

Land purchase

Acquisition or assembly of undeveloped (open or agricultural) land. The parties are the seller (the original landowner) and the buyer: a speculator, developer/builder, or an individual, household, firm or agency buying the land for its own use. In some countries government is one of the parties, in the primary developer's role.

In this transaction the land value is critical in setting the price. The fact that neighborhood effects, apart from locational and physical site attributes, are what determine land value, is a major source of uncertainty. One way buyers reduce this uncertainty is by assembling large tracts to enhance their control over their relevant environment.

This uncertainty involves information impactedness, too: information asymmetries between the buyer and the seller. The seller wants to advertise his property's development potential, so as to maximize the price. A common way of reducing the risk of seller misrepresentation is the purchase option, which makes the eventual land price contingent on (at least partial) realization of the land's development potential.

The buyer is often more sophisticated than the seller: after all, this is land speculators' and developers' business. But they are not about to share their inside information, educated knowledge, or experienced intuition with the seller. Consequently, this transaction is subject to opportunism. Misrepresentation, suggesting a lower land value than its real development potential, is of course the speculator's stock-in-trade: the concealed value difference is his speculative profit.

Manipulation is also common: e.g. secret land assembly. Buying parcels through straw men allows the purchaser to internalize the value increment of large-scale development without sharing any of it with the sellers. Developers with political influence have insider knowledge of government intentions, or the ability to affect public actions: the location of public amenities, the timing and routing of infrastructure, and designated land uses and intensities for adjacent sites or the wider surroundings. The offered price is unlikely to reflect this value increment, unless the seller's local influence and links make her an active partner. Then, both parties share the value created by their political actions.

Referring to political manipulation seems to imply public planning and zoning, but these are unnecessary. Even a minimal government, providing only basic public services, would, through its responsibility for funding and siting public amenities, and locating and constructing infrastructure and capital projects, be vulnerable to special interests with the same consequences.

Clearly, then, primary land acquisition and assembly has many idiosyncratic attributes. It represents a major investment, which may remain locked in for years before it can be realized. Even for the speculator, profitable short-term resale is a risky proposition. This transaction, even though it is a unique one-time exchange, combines significant information-impactedness, long duration, and very high uncertainty.


Procuring capital to finance land acquisition and development. The primary land purchase is often more complex than a simple sale. The buyer may be a composite entity, combining a development partner with the source of some or all of the financing. If financing is not through equity participation, it may be by borrowing, but in both cases financial institutions become active participants in the land development process.

Financing has the same problem as land acquisition: information impactedness related to the property's true land value. A financial institution as equity partner becomes subject to the same hazards as the developer. If capital is raised through borrowing, the lender is also vulnerable to manipulation. Both the amount of the loan, and the lender's security are based on the value of the asset: its development potential. In a form of moral hazard not uncommon in land development, the developer can raise his leverage by exaggerating his scheme's profitability, and (increasing the whole venture's riskiness) reduce his own exposure.

Sophisticated lenders are well aware of this hazard and invest considerable resources in acquiring precontract information. Nevertheless, though their uncertainty can be mitigated by such market supports and voluntary transaction costs, financing institutions undoubtedly have an interest in governance that can reduce uncertainty about interdependencies and future neighborhood effects, and provide authoritative information to minimize their transaction costs in precontract discovery.

Land preparation and development

To prepare his land for building, the developer has to engage professional consultants (planners, architects and engineers) and contractors. If these are simple market transactions, procuring these services is unrelated to the property's value, so it is not subject to the hazards described above.

However, often the interactions between developer, consultants, and contractors are more durable and less predictable. Interaction on one project can last years, and uncertainty about the area's development potential may involve the developer and her consultants in a joint exploration of possibilities. Contingent fee contracts are a market adaptation to this uncertainty. Their interdependence gives consultants and contractors a mutual interest with the developer in reducing the uncertainties of the land market and in governance that can provide reliable information on prospective neighborhood effects.

Often, joint involvement in land development generates repeated contracts between the same parties. This becomes a classic case of asset specificity, with transaction specific investments of expertise and resources. With the trust engendered in ongoing relationships, these links are often handled informally. But dependency risks opportunism. Consequently, vertical integration may ensue, with large land development corporations internalizing consultant and contractor services.

Land disposition

In this transaction, the developing agent (developer, builder, public corporation or agency, or local government) sells or leases developed areas or building sites to their next owner or user: a developer-builder completing site development and construction of structures for sale, or a speculative builder, or households and firms intending to build for their own use. In all these cases land disposition is subject to many of the hazards of land acquisition, except that completion of site development has reduced uncertainty.

Widespread cases of misrepresentation and fraud (like the famous Florida swamp subdivisions) illustrate the fact that development and subdivision do not eliminate the risks. Their completion does significantly enhance certainty about the area's future, raising the value of developed sites by more than the direct costs of land preparation and infrastructure. But neighborhood effects remain uncertain, and the developer's investment can represent his confidence either in his ability to predict or control them, or in the buyer's gullibility.

Both parties have a mutual interest in reducing the unpredictability of neighborhood effects. Authoritative confirmation of her assertions on the future of the surrounding area enhances the price the developer can obtain. At the same time it reduces the buyer's risk of discovering that he has overpaid when surprised by neighborhood effects, or when finding that anticipated development in the area does not materialize.


Procurement of professional and contractor services. This stage is very like land preparation and development. Though uncertainties are fewer because the property is further down the development track, they are not entirely absent. If they are totally independent, the consultants and the building contractor are not affected by the developer's uncertainties, except when he reneges on his contractual obligations to pay them. This can happen when expected demand does not materialize, e.g. after office construction booms leave developers with unlet space.

On the other hand, the landowner, professionals and contractors may be linked in long-term relationships. This holds increasingly true as the scale of development grows: in large-scale residential tracts, industrial parks or mixed developments. These relationships are sometimes institutionalized in various forms of vertical integration or equity participation, but in any case they create a mutual interest among all the parties in reducing uncertainties about neighborhood effects.

Authoritative information about a property's development potential and its surroundings is also important to some of the consultants -- planners, engineers and architects -- because it makes their jobs much easier. Indeed, in cases of high uncertainty (e.g. large-scale development on greenfield sites) their task would be impossible without it.

Property transfer

Change of ownership of land and improvements, leading to change in occupancy, changes in kind or intensity of use, additional construction or reconstruction, adaptive reuse, or clearance and redevelopment. Here, the price is still largely based on the property's value, but more of that value is based on the actual property and its neighborhood, and less on its future development potential.

The mix between these depends on neighborhood effects, and the kind of transaction. At one extreme, with maximal stability and certainty, is simple transfer of ownership, stimulated by mobility or particular changes in circumstances.

This kind of transaction makes up the bulk of most property markets. Though it is also information-impacted and has high asset-specificity (13), it is less subject to the hazards discussed above. Nevertheless, here too there is a common interest in making immunity to unforeseen neighborhood effects a self-fulfilling prophecy. This is usually effected through local government zoning, and some control over design, construction and use.

At the other extreme are property transfers premised on instability and change, initiating radical transformation of the proximate built environment. The sale of built-up land for large-scale redevelopment is much more like primary land acquisition, than the sale of a single-family home. The difference -- the existence of buildings and infrastructure -- is only relevant if those have any intrinsic value, and to the extent that the project involves clearance and reconstruction, they do not.

Here the land's development potential is again critical, and its vulnerability to interdependence and neighborhood effects is high. Like primary land acquisition, the transfer of built-up land for clearance and redevelopment has high asset-specificity, long duration, and high uncertainty. Consequently, the authoritative information that public planning can supply, on designated land use for the property, and prospective use types and intensities in the area, is at a premium.

Between these two poles are other kinds of property transfers: sales for internal alterations enabling more intensive use, or adding construction, or conversion of structures for adaptive reuse. The latter is often responding to neighborhood effects: transitional areas experiencing locational or functional obsolescence. Much as for redevelopment projects, interdependence uncertainties are high, and areawide planning can mitigate them. Public intervention is one response, but other possible governance options are discussed below.

Analysis of this generic land development process and property market reveals transaction characteristics that are incompatible with a perfect market. These transactions demand market modification in some hybrid form of governance that will minimize their costs and reduce their hazards. Some form of land use planning and development control can do this. Discriminating alignment asks: What is the most appropriate form of governance to address the transaction characteristics and hazards that have been described?

Forms of governance

A repertoire of alternative forms of governance and their transaction-related characteristics is shown in Table 1 below. These are the various ways in which land use planning and development control may be delivered.

TABLE 1: Forms of Governance in Land Development and the Property Market

Form of Governance: Third Party Governance (administrative support)
 Bilateral Governance (market support)
Agent: Public/
(Firms, corportations, households)


public planning


public agencies)

Indicative planning:
(Public planner and/
or delegated consultants)
Infrastructure, public
facilities/open space,
indicative designation
of private land uses/





public agency)
Zoning, building
regulations, other
hazard, special
area designation,

Contract zoning:
Plan as a condition of
contract of lease or
sale between public
landowner and

CCRs between
planning agent
and subsequent

The question of "make" (in-house provision of professional planning services by a government agency) or "buy" would be addressed on a case specific basis. "Buy" can include privatizing forward planning activities through procurement from consultants, and monitored delegation of governmental regulatory and enforcement activities such as plan review and building inspection to private service providers.

Planning in bilateral governance involves deliberate intervention in the land development process. This can be done directly by government and its agencies, or through public-private partnerships, which have become popular development instruments over the last two decades. It is of course also extensively done in the market itself, by large-scale landowner-developers.

Indicative planning is a form of bilateral governance where government does not intervene directly but provides indirect market support. Indicative plans show public investments (infrastructure, strategic facilities and public amenities) and indicate desired patterns of area development. An indicative plan needs private investors' confidence in government's commitment to implement its own decisions, and in the quality of its data. Its success also depends on how it incorporates market-led development that would occur in any case. To the degree that it is normative, prescribing development contrary to expected trends, an indicative plan must be supported by a political community of interests or be supplemented by other implementation tools.

The bilateral governance alternative to regulation is contractual development control, which takes two forms. When the state is the landowner, contract zoning ensures implementation that conforms to public plans. Examples include Hong Kong's long-term leasing of Crown land, The Netherlands' municipally acquired and prepared developments, and Israel's management of public lands.

On large privately owned tracts, developer-sponsored planning can link with voluntary development control in the form of contractual covenants and restrictions (CCRs). Though these are popular in North America, they are rarer in Europe, and are almost unknown elsewhere. Evaluations of their success are mixed and raise many contextual considerations, which are undoubtedly relevant to their transferability.


This institutional analysis of the land development and real-estate sector illustrates the fallacy of juxtaposing planning and the market. It is only in third-party governance that we find land use planning outside and complementary to the market. Here planning and regulatory development control are conceived of and delivered as sovereign tasks, becoming part of the land and property markets' institutional environment as institutional economics prescribe.

But our analysis reveals alternative forms of governance. In bilateral governance various forms of planning and development control exist as administrative and market supports in the market. Non-statutory planning ranges from public agencies planning in developer roles, through public indicative planning and public-private partnerships, to developer-sponsored planning of new communities and large-scale tracts. Development control that is in and by the market includes contract zoning and contractual covenants. None of this fits the simplistic dichotomy of planning and markets.

IV. Asking The Right Question

Clearly, asking which is more effective in a particular situation or to address some specific problem, planning or markets, is posing the wrong question. It is wrong because the inherent difficulties (shown above) in differentiating between planning and markets will defeat rigorous analysis of the context. In this form the question is also counterproductive, because its dichotomy excludes a whole range of possible answers that may involve both planning and markets.

There is a better question: What form (or forms) of governance is most effective for the parties involved in a particular process? TCT's discriminating alignment also offers a criterion for judging effectiveness: minimizing all the stakeholders' total transaction costs (14). More important is another aspect of judging effectiveness that TCT offers: remediability. This demands comparison between alternative feasible forms of governance, rather than evaluation against some abstract ideal.

What difference does asking the right questions make? Below I will review two papers almost randomly selected (15) from Planning & Markets to show how they could have been written if their authors had not been diverted into a comparison of the relative effectiveness of planning and markets. My critique will ask: Exactly what question does this paper raise, and how well does it answer it? How and why would asking the right question have provided different answers, and would they be better?

Fire safety regulation (Cobin, 2000)

The question this paper asks is: Is fire safety regulation effective? And if it is not, why not? This looks like a simple question, to which appropriate empirical analysis should yield straightforward answers. That is what Cobin does here. His effectiveness criterion is the change in the number of fires per 10K population, and he analyzes the incidence of fires after the enactment and during the enforcement of fire safety regulations in Northeastern Santiago, Chile. This analysis supplements a similar previous study of fire safety in Baltimore, MD.

The nine-fold increase in the number of fires/per 10,000 population over the observation period seems to provide ample evidence to prove that fire safety regulation here has not been successful (16). Combining these findings with his Baltimore analysis and other more anecdotal evidence, Cobin generalizes to conclude that "Regulation is unlikely to increase fire safety efficiently, and perhaps not effectively, because it is always constrained by inadequate local knowledge." (p.16).

This seems to be a perfectly sound answer to the questions the paper asked (17), but is it really? Even the author qualifies his conclusions: "Of course, it is impossible to say what would have happened without the fire safety regulation. Perhaps there would have been more fires."(p.18) (18) But if he can't say that, what does his conclusion say? In reframing the question in TCT terms (recalling remediability) we ask: What does "effectively" mean: effective compared to what? The paper never addresses this issue directly, but it gives some hints.

To begin with, it sets out to compare public intervention with (presumably free and unregulated) markets: "...the most interesting question scientifically is...whether...government intervention can improve on what markets do provide." (p.16) Fire safety regulation represents the public intervention side of the comparison, but where is the corresponding analysis and evaluation of "what markets do provide"?

This is limited to asserting that: " have succeeded in safety provision. There is evidence that firms...(to) please customers...and maximize profits, establish their own technical and safety standards and maintain their own inspection teams"(p.17) (19) The cited evidence can charitably be called slim: two cases (Hilton International and Walt Disney World), which even the author does not claim are representative. This is hardly a strong argument for the recommended policy " replace the current system with more effective market-based regulatory techniques." (p.19)

If Cobin had asked the right question, he might have tried to evaluate "What would have happened without the fire safety regulation", i.e. what would be the consequences (in social efficiency terms) of feasible alternative ways (20) of limiting the incidence of preventable fires. This would have extended his analysis of governmental fire safety regulation to produce a much better paper. But it might have also yielded contrary findings and quite different conclusions.

Market-based transportation alternatives (Moore, Rubin and Lee, 2000)

This paper's question is: What are the market-based transportation policy or system alternatives to Los Angeles' failing publicly owned rail transit systems. Busways (some of them replacing rail's right-of-way), competitive bus transit systems, and dedicated high occupancy toll (HOT) lanes on existing freeways are presented and discussed.

After analyzing each alternative's costs, performance, and feasibility, the paper concludes that rail transit is intrinsically doomed to poor performance and ultimate failure, because its downtown focus is a mismatch to Los Angeles' scattered distribution of travel demand. Any of the proposed alternatives (they are not mutually exclusive) will be an improvement (21).

Here the question is not wrong; it is only inaccurate. Consequently, it elicits fuzzy answers. The inaccuracy lies in the failure to distinguish between separate transportation system attributes, and then compare and evaluate options in these terms. Referring to market-based transportation alternatives implies that the significant characteristic distinguishing between the status-quo (the failing L.A. rail systems) and the proposed options is public vs. private ownership (22).

But in fact this is not so, and the paper (rightly) devotes attention to another aspect as well: transportation mode (light rail, bus, or automobile). The authors' assessment of the respective merits of the various options is quite persuasive. However, at the end of the paper, the reader is left in doubt whether the proposed alternatives are superior to rail because they are market-based, or because they all are other modes: bus and automobile.

Unquestionably, the paper's conclusion leaves room for attributing at least part of the outcomes to mode: the difference between the rigidity and high costs of light rail, on the one hand, and the flexibility, demand responsiveness, and lower costs of bus systems and automobile traffic management or congestion pricing. This weakens the paper's argument, which implies that it is market-based alternatives that matter.


These two papers illustrate two different kinds of problems resulting from asking the wrong question. The first is fundamental and conceptual, affecting the basic research design and method. The second is more superficial and essentially semantic, affecting the clarity of the analysis and its conclusions. In both papers, asking the right question from the start could have effected significant improvements.

The right question is not whether planning or the market is more effective. It is: What is the most appropriate form of governance in a particular situation, policy or problem context? By association, putting the question in this form suggests two principles (here borrowed from, but not limited to TCT): remediability and discriminating alignment.

Remediability prescribes analysis that does not just invoke abstract evaluation criteria, but assessing effectiveness by comparing feasible alternatives (23). Discriminating alignment can be understood in a broad sense, not limited to transaction characteristics. It means judging the appropriateness of possible forms of government (and other types of solutions) by assessing the fit between relevant contextual characteristics and critical attributes of alternative solutions (24).

Asking the right question and abandoning the sterile dichotomy of "planned interventions versus markets" will have some positive effects. For one, it would provide a conceptual framework for more rigorous analysis. Such analysis would distinguish between various kinds of markets and hybrid forms of governance, and identify more complex patterns of asset ownership that mix public and private control. Recognizing that planning is not the same as public intervention will enable research on planning for, in, and of the market.

For another, it will encourage consideration of the institutional design implications of policy-related analysis and evaluation. Rather than just "comparing...planned interventions (to) market solutions" (Planning & Markets, 2000), this demands more attention to developing and presenting realistic public, private, and mixed alternatives, and comparative evaluation of their respective consequences to determine: Which is most effective compared to what?


  1. Emphasis added.

  2. Such as the complete command economy (a vanishing species today, with Cuba perhaps its only surviving example) and the ideal "perfect" market (the real existence of which anywhere is still debatable)

  3. Including many planners and planning theorists; see e.g. Friedmann (1987: 38) and Sanyal (2000: 326-332).

  4. Defining planning is really quite complex: the term can be understood in its broadest sense to range from evolutionary biological adaptation through individual to social activities (Alexander, 1992.a: 69-74), and has social and practical connotations (e.g who are recognized as professional or expert planners) that vary across cultures (Alexander, 2000).

  5. Indeed, in one view the firm exists to plan: the critical incentive for the evolution of firms is the need to respond efficiently to the market's signals, requiring "decision making (that is) coordinated ex-ante in firms" (Hermalin, 1999: 104); ex-ante coordination, of course, is planning (March and Simon, 1958: 158-169).

  6. This section is a condensed summary based on Alexander (1992b, 2001a).

  7. Some sectors, e.g. human services, where most of the planning is done in government agencies, Quangos or NGOs, are an exception.

  8. For a more extended description and examples, see Alexander (1998).

  9. This does not mean that planning is identical to organization. Association means that where there is formal organization, there is likely to be planning too, because organizations rarely improvise or take unplanned actions.

  10. This section is a condensation of Alexander (2001a).

  11. Obviously, this model is invalid in command economies (e.g. Cuba) and traditional societies (e.g. Mali) where land is a common resource and private property is an exception to the norm. It is also only true to the degree that economic and property rights are subject to the rule of law. Where this is not so (e.g. in kleptocracies like Mobutu's Congo or Marcos' Philippines) or in transitional economies like Russia and China) land development may look quite different. But the model can be modified (as it must be in any case) for mixed economies to reflect specific aspects of non-market type property rights, such as ejido (communal) landholdings in Mexico, or state-owned (and leased) lands in Israel, Hong Kong, and Malaysia.

  12. This is illustrated for the case of Israel (Alexander, 2001b).

  13. As a result the property market is also modified with various forms of bilateral governance, e.g. arbitration, and third-party governance including landlord-tenant law and regulation of real-estate transactions.

  14. Net transaction cost minimization seems on its face just another form of efficiency, and other effectiveness criteria are certainly possible. But it can be an effectiveness indicator, supporting other values than simple economic efficiency. For example, if the analysis is not limited to directly involved actors, but extended to include all the relevant stakeholders and their direct and indirect transaction costs, then minimizing overall net transaction costs may enhance democracy and participation. This is because the summary criterion will then include the positive and negative (saved) transaction costs of their inclusion or exclusion from the relevant process.

  15. They were both selected from Volume 3 only (and not from all past Planning & Markets issues) because that is the first issue that came to my attention, and they were the first articles I read. After reading additional papers I decided to use these and not extend my review, because they served as illustrations as well as any others.

  16. Some intervening variables (e.g. population increase and building density) are addressed, but others are summarily dismissed, and no hypotheses regarding possible alternative contextual factors are systematically tested. Though this undermines confidence in the findings' significance, no Monday-morning quarterbacking methodological critique is intended here.

  17. Discussion of why the observed results occurred explicitly focuses on policy-relevant theoretical explanations.

  18. Of course, it's not impossible: there is plenty of excellent policy-related research to contradict this statement. To cite only one (almost randomly chosen) study addressing a very similar kind of problem: Hellan and Tabarrok's (2000) "Runaway Judges" analyzing jury awards in tort trials. They did present and evaluate the feasible alternative: judges. Their rigorous empirical statistical analysis of over 86,000 trials and settled cases evaluated what happened: win rates and awards, explaining the outcomes in terms of a wide range of possible factors: from sample selection (types of cases) to local poverty rates, and coming to the incontrovertible conclusion that reform by putting all damages cases before judges will hardly have any perceptible effects.

  19. On its face, this suggestion is counterintuitive: firms are much more likely to save on avoidable safety measures so as to minimize their costs, than they are to invest in them in order to satisfy customers and maximize revenues. Of course, highly image dependent enterprises like the cited cases would reverse this rule, but extensive experience in related fields (such as environmental pollution externalities and worker-safety regulation) confirms it. In this study, this assertion could have been tested.

  20. This could have included a systematic evaluation of the kind of market-based voluntary self-regulation he describes, and the expected consequences of other market-regulatory incentives such as insurance.

  21. Though the article's conclusion implies an effectiveness criterion of contributions to reducing congestion, no such evaluation was systematically done. The discussion of each alternative produces a "soft" assessment of its relative effectiveness.

  22. In the paper the discussed options are not clearly differentiated by mode and ownership. The rail systems are all public, and privatization is not explored (for good reason, given the mode's obvious drawbacks). But bus transit might be public or private, and it is conceded that public bus transit is still more effective than rail. HOT lanes are a market-based alternative, to the extent that they rely on automobiles. But they are also a public policy intervention, and would not be market-based to the extent that they provide dedicated lanes for public busses (to which the paper also refers). Specifying a set of clearly differentiated alternatives in a matrix combining different modes with different forms of ownership (perhaps also distinguishing between infrastructure and rolling stock/operation) might have produced a more useful analysis.

  23. This is especially important for any policy or institutional analysis that involves evaluating the status-quo (as almost every such analysis does), because only comparative evaluation leaves open the possibility that the status-quo is after all optimal. Not incidentally, evaluation by comparing feasible alternatives is a common feature of decision models from formal rationality to disjointed incrementalism.

  24. "Fit" in this sense identifies effectiveness with successful institutional adaptation (March and Olsen, 1989); for examples in different contexts and discussion see Alexander (1995: 282-284) and Krill (1998: 2-3).


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