Zoning

Further, the unzoned city will be one of haphazard construction, fall ing property values, instability, dis regard for neighborhood ttcharacter," irrational allocation of property-and a haven for unscrupulous specula tors. Zoning is the attempt to suppress these supposed market defects by Dr. Block is Senior Economist, The Fraser Institute, 626 Bute Street, Vancouver, B. C., Canada, V6E 3M1. 470 legislatively prohibiting incompati ble uses of land. Under this ordi nance, the pickle factory would be prohibited from residential neigh borhoods and required to locate it self in a special industrial area, re served for that kind of operation. There, surrounded by similar uses, it would presumably do little harm. The zoning idea has a certain ap peal. What, after all, could be more simple and obvious? If land usage seems imperfect, all that is needed is the enactment of a set of laws compelling proper behavior. Argu ments for zoning are so widely made and frequently accepted that even those who otherwise appreciate the merits of the competitive market system have felt constrained to make an exception in this instance. In view of this state of affairs, and given the serious drawbacks in zoning which are continually making themselves felt, it is of the utmost importance to ZONING: A TRAGIC PUBLIC POLICY 471 consider such legislation clearly and dispassionately.

Confronting the charge that zon ing is all that stands between a via ble urban environment and chaos is ~~Exhibit A," the City of Houston-which has never enacted such legis lation. The very existence of a large North American city (an area in ex cess of five hundred square miles and a population of 1.6 million) which can function normally and continue to grow without zoning is a major piece of evid~nce against the tradi tional view that zoning supposedly protects against chaos. Divergent Tastes In Zoning: Its Costs and Relevance for the 1980s (The Fraser Institute, British Columbia, 1980) a survey is made of several empirical land use studies in Pittsburgh, Boston, Roch ester, Houston, and Vancouver. The effects of ~~incompatible uses" on property values are traced. The overwhelming preponderance of ev idence casts serious doubt upon the presence of uniform external dise conomies. (External diseconomies are said to prevail when A harms B by doing C, and B cannot collect dam ages nor force A to cease and desist from such activities. Uniformity would mean that all market partici·· pants view C as harrnful.) The reality appears to be that ei ther there are few significant inter dependencies and externalities in urban property markets or that ~~One man's meat is another man's poi son." One and the same phenome non, such as the presence of com merce in an otherwise residential neighborhood, is interpreted in a positive way by some people and in a negative way by others.

The point is that market processes exist naturally to eliminate such ex ternalities that would arise from the proverbial glue factory on the corner of Park Avenue and East 65th Street. In a system based on the inviolabil ity of private property rights, the laws of nuisance would prevent the dispersion of invasive odors, or dust particles. But the market process functions even without this protec tion. Quite simply, land prices in the residential or business neighbor hoods are too expensive for the glue factory; they effectively prohibit any but the most valuable, concentrated uses-such as large office buildings or high-rise residential dwellings. This view is supported by Roscoe H. Jones, Houston's Director of City Planning. In his opinion the market t~has tended to create a reasonably well-ordered pattern. Because of private tmarketplace zoning,' we find no filling stations atthe end of cul de-sacs; ship channel industries are, naturally, located along the Ship Channel, and so on."

The natural proclivities of the market would also protect against the tthit and run" land developer who 472 THE FREEMAN August is said to leave an excessive popula tion in his wake, swamping munici pal services. A developer who tried to pack too many people into an office building would have difficulty finding mort gage assistance. Lenders would re alize that such compressed condi tions would overload services, resulting in tenant dissatisfaction, lower rents, and the possibility of mortgage default. It is of course true that builders and lenders can make mistakes, and that some over crowded structures might be built, but the inexorable forces of profit and loss would ensure that such er rors were few in number. Zoners are likewise subject to miscalculation; the problem is that there are no au tomatic bankruptcy procedures to weed out bureaucrats with poor judgment. One of the most persua sive arguments against zoning is the fact that it institutionalizes errors.

In effect, planners do not have the incentives to ~~get it right," nor do they suffer the consequences of ~~get ting it wrong." The competitive sys tem thus can obviate the need for building height restrictions, set back requirements, floor space ratios, and other bureaucratic measures which artificially attempt to limit density. Undue Strain on Public Services The typical pro-zoning argument is couched not in terms of undue strain on halls and elevators, which are internal to the building, but rather in terms of the effects of high density on social overhead capital: electricity, gas, water, sewers, roads, sidewalks, parking, public transit, parks-all of which are external to the subject premises, I.e., externali ties. But this should give us pause for thought. For surely. there are other amenities necessary for the success ful functioning of a large office building, which are or can be consid ered externalities, but which do not concern the city planner nor unduly worry anyone else: for example, res taurants, barber shops, banks, jew elry stores, pharmacies, stationers, and the like. One reason may be that every member of the former category is run by public or quasi public enterprises while the latter are all managed privately.

When the excavation for a new of fice building is begun, the small merchants in the neighborhood roll up their sleeves in anticipation of the new customers and·· additional profits likely to come their way. Their first thoughts are concerned with physical expansion, adding extra shifts, providing more services. The contrast with the bureaucratic ori entation is stark indeed. At the prospect of new building, the bu reaucratic tendency is to ponder the ~~strain" additional hordes of people will place on public services. Their answer is to place a myriad of zon1981 ZONING: A TRAGIC PUBLIC POLICY 473 ing restrictions on the new builders, instead of encouraging coordinated expansion. Thus it appears that if error and hence the need for correction lies anywhere, it is not with the ((rapa cious builder" who places ((strains" on public services, but rather with those charged with the provision of the infrastructure: those in the gov ernment sector. Perhaps the answer lies in improving the provision of these services, not in holding down new construction.

The Case of Houston A useful comparison is the case of Houston. Here the practice is not to hem in the private market with a bewildering array of complex zoning restrictions, but rather to cooperate with the land developer by forecast ing the growth patterns in order that the city government may supply the necessary municipal facilities and services. It must be emphasized that zoning is only one weapon in the planning arsenal: even were these restrictions scrapped in their en tirety, the public authorities would still exercise great control over land use patterns through (1) provision of infrastructure and amenities, such as parks, water mains, sewer place ments, and the layout of freeway and major arterial streets; and (2:) direct land use controls concerning building heights, set backs, floor space ratios, and the like, but applied uniformly to an entire city, and not differentially to districts within its boundaries.

This does indeed undercut much of the case for zoning. But in the in terest of creating further discussion, one might even question whether government has a comparative ad vantage, vis-a-vis the market, in the creation of such products and con trols. Without a market-created price system, it is extremely difficult for the public official to rationally allo cate resources. Moreover, no profit or loss automatically accrues to him as a spur in decision making. He risks none of his own money, and can earn no honest profit from cor rect choices. Declining Property Values There are few things feared more by the average urban property owner than declining residential values. This is understandable, for much of the real savings of the typical citi zen is tied up in a single family house. Perhaps this is the most im portant explanation for the high re gard with which many citizens hold zoning legislation-it is supposed to protect property values.

But the view that zoning is the best guarantee of stability is incon sistent with the evidence: The sta bili ty of neighborhoods that zoning seeks to protect thus appears to be endangered by the rezoning that is part and parcel of the enactment of 474 THE FREEMAN August zoning by-laws in the first place. What security can zoning provide against the possible ravages of the glue factory if its provisions can be rescinded at any time? Of far greater reliability may be the system of deed restrictions, or restrictive covenants, as practiced in Houston, whereby the property owner may contract with his neigh bors concerning the uses to which land may subsequently be put. Al ternatively, land developers may re quire, as a condition of sale, that all purchasers agree to continued land usage, either for a stipulated (long) period of time or until a majority vote of such buyers overturns the agreement.

This system is far more flexible. Even the maintenance of single family neighborhoods by zoning statutes is questionable: by keeping land and buildings in the same use over time, zoning can promote neighborhood decay and speed the demise of the single family neigh borhood. Zoning is a rigid control, and is likely to fracture during times of change in consumer tastes, neigh borhood demographic structure, ur ban growth, and transportation and building technologies. No Guaranteeof Values Ultimately, of course, there can be no absolute guarantee against de clining property values. A fall in the price of wood, an increase in the market rate of interest, the sale of publicly held lands, technological improvements in prefabrication methods can all reduce housing prices. One might perhaps· contract with an insurance company for the preservation of home values, but the cost of the premium payments would have to be subtracted, thus defeat ing the plan.

Value preservation is a will-o'-the wisp, for price is a manifestation of the worth placed on an item not by one person, but by two groups: po tential sellers and potential buyers of items like the one in question. We can not speak with certainty of the value an owner will place on his home in the future; it is even less possible to assess the worth a future hypothetical buyer will give it. It is clear, moreover, that that which is owned is the physical house, and not its value. For while the owner has a right to collect damages from the boy who breaks a window with a ball, he has no such right with re spect to the man who invented pre fabricated housing-even though the latter might well have been respon sible for a greater drop in the value of his house than the former. While citizens have a clear and obvious right to have their homes protected from physical damage, this does not apply to the value of their property. Yet this is precisely what zoning seeks to preserve. Thus not only must such legislation fail to ac1981 ZONING: A TRAGIC PUBLIC POLICY 475 complish this task-it woul,d be im proper even if it could do so.

Uniformity Another shortcoming associated with zoning is the uniformity it en genders. And this is not surprising: to divide all building into residen tial, commercial, and industrial, as the early enactments did, and then to impose these three categories upon the entire pattern of future con struction, is hardly likely to foster architectural innovation. This rigidity soon became evident, and an effort was made to become more ((flexible." The zoning codes added variances, exceptions, Planned Unit Developments (any excess building in one parcel is to be offset by a reduction in another within the planning district), mixed-use zones, performance zoning systems, land use contracts, and development per mits. In one respect these reforms were a plus, for the system became less rigid. But this change ushered in a new crop of problems. For one thing, the system became even more complex. Literally dozens of dis tricts have been defined; what may and may not be done with each is subject to a bewildering and. grow' ing number of regulations. The days of three-district zoning with two or three pages of regulations have long since passed. Today's ordinances are continually growing to accommo date more detailed regulations of use, lot size, building height and bulk; more reasons for granting vari ances, bonuses, and special excep tions; and much more complicated procedures for appeals and reviews.

Today few sets of zoning regulations appear in tomes of fewer than 500 pages. A system with so many complica tions, exceptions and changes could no longer be governed by any clear set of rules or principles. The proce dure instead became one of (Judging each case on its merits" in an ad hoc manner. Although this might appear to some as fair and judicious, the flaws in it are grave. First, it is a clear retreat from the idea of zoning itself. According to this philosophy, urban planners were assumed to have enough wisdom to forecast, at least in broad brush strokes, the future spatial organization of the city. But the very need to grant numerous ex ceptions, as a continuing institu tionalized process, has belied this claim. Ability to incorporate the needs of a changing future is sim ply incompatible with patchwork changes as reality confronts the master plan. It is akin to claiming the ability to forecast inflation for the next five years-and then changing the prognostication each week.

Secondly, as Nobel Laureates Mil ton Friedman and Friedrich Hayek have so eloquently shown, (Judging 476 THE FREEMAN August each case on its merits" is the ab sence of lawfulness-not its pres ence. Each has demonstrated (the former in his analysis of ((rules not authorities" in monetary policy; the latter in his work on the ((rule of law") that to consider matters on a ((case by case" basis is to color the judicial process with stultifying ar bitrariness. The Rule of Law The proper scope of government, in this view, is to set down the rules of the game, clearly, and before the contest begins-and then not to con tinually alter them in the midst of the fray. Under these conditions, the individual i~ free to pursue his law ful ends, secure in the reasonable knowledge that the government powers will not suddenly be used to frustrate him at every turn. But a zoning system, especially a ((flexi ble" or ((reformed" one, can change the uses to which a land parcel may be put at any time. It is thus clearly destructive of these ends.

Thirdly, zoning complexity and changeability have spawned graft and corruption. The reason for this is easy to discern: a less restrictive variance may be worth millions of dollars to the land developer. Be the bureaucrat ever so honest, he will be sorely tempted by a share in these gains-especially in an era where rezoning is an easily contrived and commonplace occurrence. Paradoxically, this is not necessarily all to the bad. If a bribe can convert a land parcel to a use more highly prized by consumers, wealth and the allo cation of resources will have been much more nearly optimized. This is not the first case on record attesting to the benefits ofblack markets. The great loss, however, is the general disrespect for the law engendered by this practice. Private Zoning If zoning can be defined as match ing specific areas of land with par ticular uses, then nothing said above should be interpreted as opposing private zoning. Indeed, it is impossi ble for any rational land developer to act in any other way. He must, if he is to function at all, decide to place the garage here, the house there, and the backyard elsewhere.

How else could he conceivably oper ate? But this is all that is meant by private zoning. The case is an exact parallel to the planning debate. As has been said many times before, people must plan if they are to act rationally. The de bate, then, is not between planning and non-planning. It is between cen tral planning, on the part of the gov ernment' and individual planning, as coordinated through the market place. Similarly the real issue here is not the choice between zoning and non-zoning; it is between private and governmental zoning. What has been 1981 ZONING: A TRAGIC PUBLIC POLICY 477 criticized above is government zon-shopping centers and malls. Since ing, not the private variety. the various tenants are contracWhat is private zoning? The most tually unrelated to one another, the well-known example is, of course, situation is closely analogous to Houston's system of deed restric-governmental zoning. Private en tions. Private zoning also takes place trepreneurs, however, are judged, in every time a glue factory is priced their profit and loss accounts, by how out of a residential neighborhood, or well they promote positive external whenever the gas station locates on ities and repress negative ones. And, a major thoroughfare, not in a side in fact, it is difficult to imagine two street. But it also includes such pro- ((incompatible" tenants adjacent to saic activities as the individual's ar-each other in a shopping mall. Any rangement of household furniture, such mal-zoning would only, in the the office's placement of desks and long run, reduce the landlords' total room dividers, the factory's disposi-receipts.

tionof machines and guardrails, and There is a vast reservoir of private the shopping mall's apportionment zoning efforts operating in the econ of its tenants. omy, unreported, under-publicized. Items for sale must be deployed in This brief discussion has barely the most advantageous manner pos-scratched the surface. But it can be sible. Thus merchants match store viewed as one more aspect of the areas to particular uses. The success case against public zoning efforts. of each enterprise rests, in great part, What public policy recommenda upon the skill in such ~~zoning." If tions follow? Although one must al the grocer discovers, for example, ways be cautious and realize that no that apples and oranges sell better one solution can offer a total pana in close proximity, or that the jux-' cea, there is a strong presumption taposition of corn and peas detracts toward the non-zoning extreme of from the sale of both, without any the spectrum. After all, zoning has offsetting benefits on the remainder not worked very well. The external of the stock, he can profit by incor-ities that it is designed to amelio porating this information into his rate have been shown to be minimal ~~zoning" decision making. He will or nonexistent. The maintenance of gain a. competitive advantage over single-family neighborhoods by zon those of his colleagues who are not ing statutes is also questionable.

similarly skilled. It is in this way One might even take an extreme that the market promotes efficient position here, and advocate abolish zoning. ing the system of government zonThe same process is at work in ing-root and branch. @ Roger Ream What Causes Wealth? THE POOR are still with us. Despite tremendous advances in agriculture and industry, poverty persists. But why? Why do some people suffer life long poverty? Why do others enjoy high standards of living? What makes possible decent, even com fortable, conditions? These are age old questions. Over the centuries the normal hu man condition has been subsistence in a state of relative poverty. Wealth was the exception rather than the rule. The first major work of eco nomics, written in 1776 by Adam Smith, was appropriately entitled An Inquiry into the Nature and Causes of The Wealth of Nations. It was the existence of wealth and prosperity that required an expla nation, not the fact of poverty; hence Roger Ream is Director of seminars of The Founda tion for Economic Education.