13. Transition to Private Roads

Let us posit that the full privatization of all roads, streets, avenues, thoroughfares, highways, and byways is the proper goal of public policy. Here, we are assuming, arguendo, that this end is desirable,¹ and are at present confining ourselves to the transition stage from present institutional arrangements to it. That is, we ask, how do we move from the present state of government ownership of such transportation arteries to one of complete privatization? We shall answer this question in two stages: the first, very briefly, since there is a large extant literature on this subject and the second, much more intensively, since there is not. The first stage of our analysis, then, is addressed to the issue of what is the appropriate transition process for privatizing any resource? The second seeks to answer the question of how can this be applied to the special challenges which arise with regard to road privatization?

PRIVATIZATION IN GENERAL

There are several methods that can be utilized regarding any governmental holding, such as a factory or forest. The worst one, always, from the libertarian point of view, is to sell the resource to any willing buyer. This is because a sale implies that the state will receive money in return for “its” property. But the government has no wealth at all but that which was seized from individual owners in the first place. It may “own” the resources in question as a matter of law, its own law, but certainly not as a matter of justice. The most just and hence best means of dispersal of governmental holdings to the private sector is to give the property in question, with no strings attached whatsoever, back to the rightful owners, i.e., the persons from whom it was stolen in the first place. For example, if the government nationalized a house or factory, privatization should consist of the return of this stolen property to its original and assumed rightful owner. If the property was built with tax revenue or purchased on that basis, as is true in the case of roads and highways, then it should be given back to the people in proportion to their tax payments (or tax burden, if this cannot be ascertained). That is, the rich should get the lion’s share since they were forced to pay the most, and the poor the short end of the stick since relatively little was plundered from them in order to first erect the edifice in question. It is only if, for some reason, the rightful owners cannot be identified, and the property can reasonably deemed to have fallen into a state of nonownership, that the principles of homesteading or syndicalism should be brought to bear.² Another problematic distribution scheme is to impose conditions on the new private owners, however they are determined, such that they cannot, in turn, sell their shares of it or buy as many others for which they can find willing vendors; e.g., an attempt to keep ownership concentration ratios below any given level. This was a mistake made in the privatization of the British Columbia Resources Investment Corporation.³

ROAD PRIVATIZATION

With these remarks, we are now in a position to analyze the special circumstances of road privatization. Must we modify any of these general privatization considerations in this case?

Blockades. One argument for the thesis that roads are different, and thus either cannot or should not be privatized, or, if so, that special provisions applicable nowhere else must apply here, is based upon the “blockade problem”: if the four streets surrounding the block in which my home is located are privatized, then I can be blockaded in, or entrapped. Alternatively, I can be made to pay such a high price for egress and access to my own property that virtually the entire capital value of it would end up being captured by these private road owners, e.g., the “entrapping” firm or firms will charge a fee just below the present discounted value of the house. We know that this scenario could not occur in the natural operation of a free market in road provision (see chapter 1). No one would purchase such a home, initially, unless access and egress rights were first stipulated, and at a mutually agreeable price, at present and in the future as well. Just as “title search” is now the order of the day in real estate transactions, so, too, would “access search” come to be a commonplace in the free society earmarked by private roadways. This being the case, no proper disbursement of public streets into private hands could ignore this issue. For, to do so would in effect be to give to the private road owners not only the streets themselves which is part of the explicit privatization plan, but also (the value of) virtually all the property “entrapped” by these traffic arteries. What, then, could be done to obviate such a monumental injustice? One possibility would be to add a codicil to the transfer of the roads (however else effectuated); to wit, that due weight would have to be given to the contrary-to-fact, hypothetical bargaining over these access rights that would have, but did not, take place, since no private road market existed. Here, the new private firms would own the street, but they would be subject to the side order constraint that they grandfather in all extant property owners abutting their newly owned roads. As for complete newcomers to the area, e.g., those traveling through it for the first time or those who purchase real estate lying within the bounds of these recently privatized avenues, they could be charged as much as the market will bear. But, for those already established, and also their visitors, repairmen, deliverymen, etc., due consideration would have to be given to this hypothetical contrary-to-fact bargaining over egress and access. How, in turn, might this be done? One possibility is to look at the market value of rights of way in arenas where this is subject to open and free bargaining, and then to incorporate this knowledge into newly privatized roads. For example, Christopher Muller notes that, with regard to his railroads, “James J. Hill encouraged settlement by letting immigrants travel halfway across the country on his railroad for ten dollars if they would settle along the route. He rented entire families freight cars for little more money.”⁴ The point is, if this railroad magnate was attempting to attract people to live on territory abutting his holdings, he must have offered them inducements to do so. Borrowing a leaf from his and other such offers would be of help in solving our present challenge. Continues Muller: “Unlike other railroad builders such as Cornelius Vanderbilt who built their railroads around a population, Hill built a population around his railroad.” Precisely. But if you are going to do this sort of thing, you must make attractive offers to would-be future neighbors.

Scale. Another possible problem in road privatization stems from dangers involving the scale of holdings. In order to put this difficulty into context, we must reflect upon yet another objection to road privatization: that the motorist would have to stop in front of each house and pay a few pennies in tolls, which would grind traffic to a virtual standstill.

The implicit assumption behind this objection is that roads would be given out piecemeal; each property owner abutting a street would receive a section of it stretching from one end of his property to another, and extending halfway into the thoroughfare; the other half would be given to his across the street neighbor. But nothing could be further from the truth. No reasonable privatization scheme would divide up the streets in so monstrously unjust, to say nothing of inefficient, manner. First of all, to do so would violate, with a vengeance, all strictures of viable scale. It would be as if a factory to be privatized were first divided into 100,000 parts, a brick here, a faucet there, and given to its similarly numbered owners in that format.⁵ The road, as a unit, consists of far more than any one of these pieces, or even thousands of them put together. The viable street ownership unit stretches, at least, for several miles in length, and not one but both sides of it would be included in the package. Certainly, this is the format that characterized roads built by private interests historically.

Second, if we are to transfer the road to private individuals in proportion to the taxes they have paid for their creation and maintenance, it is by no means clear that this is proportional to street frontage. Surely, a smaller piece of real estate in a luxury neighborhood pays more taxes than does a larger one in a poorer area. Even assuming away this objection, there is simply no warrant for dividing the road into 100,000, 10,000, or even 1,000 ownership units. Instead, if there are indeed to be 10,000 different owners of a given street, since there are that many homes with frontage, a more rational plan is to create a new road owning firm with 10,000 shares, these to be given to each of the owners, not according to frontage, but rather based on taxes paid in the past.

Any one person, or holdout, could charge exorbitant prices. If two of these property owners lived at opposite sides of the same street, they could effectively shut off all traffic, as in the case of the blockade in the game of Parcheesi. Since privatization is an attempt to anticipate the market, or to be congruent to it, and this sort of ownership pattern has never emerged under free enterprise, there is no reason to suppose that this would be a viable plan for transferring streets into the private sector.

Externalities. At present, the city government manages all roads within its jurisdiction. As such, it can be presumed, at least at the outset, that the quality of the job it does would be homogeneous throughout. If so, then no geographical areas would be privileged by spillover effects on property values vis-à-vis any other. That is, it would not be the case that property values in one neighborhood would rise more than those in others, due to the efforts of the street czar.

All would be different, it might be contended, under private ownership of streets, particularly if there were dozens, not to say hundreds, of separate road firms in a given city, with the resultant heterogeneity of management skills thereby implied. Now, property values would depend upon the varying, possibly very much so, skills of abutting road owners.

It cannot be denied that this is a transition problem in that once the firms were set up and operating, the values of real estate holding adjacent to the specific roads would tend to be capitalized by the quality of the given management. If road A were managed well, for example, then the property surrounding it would rise in value. Thus, a new buyer would no longer be impacted, as to land values, by the management skills of other firms.

The objection then, to the transition period, but not to the underlying idea of privatized roads, is that during this interim land values would be haphazardly impacted, raising some here, reducing others there, and leaving them untouched in yet other places, with no rhyme or reason. This would play havoc with rational economic planning, as there would be no way for entrepreneurs to act in a coherent manner in the face of this hyper-uncertainty.

But this objection, too, is without merit. First of all, it is by no means true that road bureaucrats act homogeneously. There is, after all, such a thing as booty or plunder seeking.⁶ That is, typically, the rich and/or the well organized, which are typically the same thing, are able to direct more than a proportionate share of public resources to areas in which they reside, or have business interests. Thus, what the critics fear in the case of the transition of roads to private ownership is already a concomitant of the present, statist system.

Second, there is a difficulty in how the objection is necessarily posed. It relies on the coherence of “management acting homogeneously.” Does this imply equal expenditure on the part of all road owners? Hardly, since money can be well or poorly spent. Even on the assumption of equal quality of spending money, whatever that means, in turn, there is still the question of whether the “equality” is to be normalized for value of the road, or its length, or length multiplied by number of lanes and their width, etc. Also, how do we incorporate the differences between winding roads and straight ones? Those that are well banked, and those that are not? The concept of “quality” has in most cases a difficult, subjective element to it, which makes comparison difficult, and the present case is certainly no exception to this rule. Does it consist of filling in potholes, reducing the roughness of the road, the dangers for motorists who use it, the speed with which one can travel, the congestion levels? If this objection must be couched in such ambiguous phraseology, it loses much of its power. The point is, in markets, all of these hard to pin down considerations are amalgamated in one fell swoop into one statistic: profit. But this is impossible in the absence of market institutions.

Third, one can only properly own physical property, not the value thereof.⁷ The latter is determined by potentially thousands of buyers and sellers, any of whom could become the marginal purchaser or vendor, who actually determines price and hence property value. If a man truly owned the value of his property, as opposed to a bundle of rights pertaining to its physical inviolability, then one could forbid all of these other economic actors (including that man himself) from independent decision making, lest any of them, horrors, act in such a way, by purchasing or failing to purchase, for example, a complement or substitute. To take another instance: under the doctrine of sanctity of property values, not physical property, society would have the right to forbid blacks from making real estate purchases in previously white neighborhoods, on the assumption they drive down property values, a manifest injustice and rights violation against them.

Fourth, there is a market remedy, readily available, to any individual who is unduly worried about the impact of the management style of the new private road firm on the value of his real estate holdings: take a position in this very company; buy shares in it; kick out the inept manager, and install your own team. This is thus hardly a serious objection to the transition to a private road industry.

Fifth, there is nothing unique about roads in this regard. The “problem” of a firm affecting the property values of its neighbors is hardly limited to the case of streets. Rather, it is ubiquitous. If the bakery next door to my butcher shop does a land-office business, some of his customers are bound to find their way onto my own premises. If, in contrast, he can’t cook his way out of a paper bag, there will be fewer customers of his I can snare to my own benefit. And vice versa. Does this means that once the government nationalizes bakeries and butcher shops, this negative externality argument would prevent the denationalization of these industries? Not a bit of it.

Coercion. Next, we consider the objection that the homeowner is required to accept a contract with the new road owner. The difficulty here, and the force of the objection, is not that the contract may not be a fair, just or appropriate one. And, as we have seen above, this legal agreement would attempt to incorporate into it protections for the property holder against blockades.

The problem is, rather, that the owner of the land abutting the road is compelled to accept this contract, whereas, in an ideal situation, people can pick and choose which contracts to sign, and which to avoid. Yes, this is indeed a problem. In the truly free society, no one is forced to deal with anyone else. And here, admittedly, the property owner of interior land will have to deal with the road owner(s) who surround his holdings.

There are two ways to deal with the objection: one valid, the other not entirely so. Let us consider the invalid argument first. It is possible to argue that this difficulty is by no means limited to roads. For example, when the previously nationalized bakery or butcher shop becomes returned to its proper home, private enterprise, the people who used to patronize the government-run provider of these services will have no choice but to become customers of the new, privately operated firms selling these products. This claim is strengthened if these are the only such operations in town, and the next closest purveyor is located hundreds of miles away. This argument goes some of the way in the direction of dealing with the objection but does not completely attain this goal. The kernel of truth in it is that the land owner in question might conceivably not be as much inconvenienced by the transition to private roads as would hold true for the buyers of these foodstuffs. The latter might actually die, if alternative sources of food were not attainable; the landlocked homeowner need suffer no such fate, given that due consideration is given to the blockade issue.

Where this argument fails, however, is that, still, the blockaded owner is compelled by law to deal with the new road owner abutting his property, and this is simply not true for the grocery shopper. And this, despite the fact that the latter might die as a result of the privatization, and cannot occur, arguendo, in the case of the former. That is, we must distinguish between dying as a result of privatization, a scenario we are contemplating merely for the sake of logical argument, and being forced by law to deal with a firm, regardless of the outcome in terms of life expectancy. The objection we are now considering concerns only the latter issue; thus, no resort to the former can fully answer it.

A better reply to this objection is to note that the difficulty stems not from the privatization process itself, but rather from the initial takeover by the government of the road building industry. The reason the landlocked property owner must deal with the new, private road owner, if there is to be a new, private road owner, emanates from the very logic of the situation.

Like it or not, the landlocked property owner, at present, is logically compelled to deal with the abutting road owner, which happens to be the state apparatus. The reason internal landowners are forced to deal with road owners, whoever they are, private or public, is part and parcel of geographical praxeology. Absent tunneling under the road, or building a bridge over it—that is, if we confine ourselves to two-dimensional space—Euclidian geometry, not man made law, mandates that homeowners somehow “deal with” road owners. All that privatization will do is change the identity of the institution, from public to private, that Euclid “forces” the landowner to be related to, contractually.

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^*This chapter is dedicated to my skeptical friend, Bill Barnett, my colleague at Loyola University New Orleans.

¹For support of this contention see David Beito, “From Privies to Boulevards: The Private Supply of Infrastructure in the United States during the Nineteenth Century,” in Development by Consent: The Voluntary Supply of Public Goods and Services, Jerry Jenkins and David E. Sisk, eds. (San Francisco, 1993), pp. 23–48; David Beito and Linda Royster Beito, “Rival Road Builders: Private Toll Roads in Nevada, 1852–1880,” Nevada Historical Society Quarterly 41 (Summer 1998): 71–91; David Beito, “Voluntary Association and the Life of the City,” Humane Studies Review (Fall, 1988); idem, “Owning the Commanding Heights,” Essays in Public Works History (1989), vol. 16; Walter Block, “Free Market Transportation: Denationalizing the Roads,” Journal of Libertarian Studies 3, no. 2 (Summer, 1979): 209–38; idem, Zoning: Its Costs and Relevance for the 1980s (Vancouver, B.C.: Fraser Institute, 1980), pp. 299–330; idem, “Public Goods and Externalities: The Case of Roads,” The Journal of Libertarian Studies: An Interdisciplinary Review 7, no. 1 (Spring, 1983): 1–34; idem, “Theories of Highway Safety,” Transportation Research Record 912 (1983): 7–10; idem, “Road Socialism,” International Journal of Value-Based Management 9 (1996): 195–207; Walter Block and Matthew Block, “Roads, Bridges, Sunlight and Private Property Rights,” Journal des Economistes et des Etudes Humaines 7, nos. 2/3 (June–September 1996): 351–62; Walter Block, “Roads, Bridges, Sunlight and Private Property: Reply to Gordon Tullock,” Journal des Economistes et des Etudes Humaines 8, nos. 2/3 (June–September 1998): 315–26; idem, “Private Roads, Competition, Automobile Insurance and Price Controls,” Competitiveness Review 8, no. 1 (1998): 55–64; idem, “Road Privatization: A Rejoinder to Mohring,” Privatize Roads and Highways (Lewiston, N.Y.: Edwin Mellon Press, 2005), also reprinted as chap. 19 in this present volume; Fred Foldvary, Public Goods and Private Communities: The Market Provision of Social Services (Cheltenham, U.K.: Edward Elgar, 1994); Michelle Cadin and Walter Block, “Privatize the Public Highway System,” The Freeman 47, no. 2 (February 1997): 96–97; Bryan Caplan, “A Practical Proposal for Privatizing the Highways and Other ‘Natural’ Monopolies,” Economic Notes 72 (London: Libertarian Alliance); John M. Cobin, “Market Provisions of Highways: Lessons from Costanera Norte,” Planning and Markets 2, no. 1 (1999); Andre De Palma and Robin Lindsey, “Private Toll Roads: Competition under Various Ownership Regimes,” The Annals of Regional Science 34 (2000): 13–35; idem, “A Model of Curb Rights In Private Urban Transit Markets,” Canadian Transportation Research Forum (2001): 581–96; Dan Klein, “The Voluntary Provision of Public Goods? The Turnpike Companies of Early America,” Economic Inquiry (October 1990): 788–812; Dan Klein, John Majewski, and Christopher Baer, “Economy, Community and the Law: The Turnpike Movement in New York, 1797–1845,” Journal of Economic History (March 1993): 106–22; idem, “From Trunk to Branch: Toll Roads in New York, 1800–1860,” Essays in Economic and Business History 11 (1993): 191–209; Dan Klein and G.J. Fielding, “Private Toll Roads: Learning From the Nineteenth Century,” Transportation Quarterly (July 1992): 321–41; idem, “How to Franchise Highways,” Journal of Transport Economics and Policy (May 1993): 113–30; idem, “High Occupancy/Toll Lanes: Phasing in Congestion Pricing a Lane at a Time,” Policy Study 170 (November 1993); Bertrand Lemennicier, “La Privatisation des rues,” Journal des Economistes et des Etudes Humaines 7, no. 2/3 (June–September): 363–76; Gabriel Roth, A Self-Financing Road System (London: Institute of Economic Affairs, 1966); idem, Paying for Roads: The Economics of Traffic Congestion (Middlesex, U.K.: Penguin, 1967); idem, The Private Provision of Public Services in Developing Countries (Oxford: Oxford University Press, 1987); John Semmens, “Road to Ruin,” The Freedom (December 1981); idem, “The Privatization of Highway Facilities,” Transportation Research Forum (March 1983); idem, “Highways: Public Problems and Private Solutions,” The Freeman (March 1985); idem, “Intraurban Road Privatization,” Transportation Research Record (1987): 1107; idem, “Using Competition to Break the U.S. Road Monopoly,” Heritage Foundation (December 14, 1987); idem, “Privatization: Saving While Serving the Public,” Goldwater Institute (April 25, 1988); idem, “Taking Over the Roads,” Liberty (November 1988); idem, “Why We Need Highway Privatization,” Laissez Faire Institute (March 1991); idem, “Private Highways? They’re Cheaper, Better, Fairer,” Phoenix Gazette, 3 April, 1991; idem, “The Rationale for Toll Roads: You Get What You Pay For,” Phoenix Gazette, 16 December 1992; idem, “Highway Privatization: What Are the Benefits for Arizona?,” Goldwater Institute (December 1992); idem, “From Highways to Buy-Ways,” Spectrum (Fall 1993); idem, “Highway Investment Analysis,” Arizona Department of Transportation (December 1994); idem, “Privatize Driver’s License, Registration System,” Tribune, 25 December, 1994; idem, “Privatizing Vehicle Registrations, Driver’s Licenses and Auto Insurance,” Transportation Quarterly (Fall, 1995); idem, “Selling the Roads: Privatizing Transportation Systems,” Liberty; idem, “Goodbye, DMV,” Liberty (January 1996); idem, “Selling the Roads: Privatizing Transportation Systems,” Liberty (1996).

²Hans-Hermann Hoppe, Democracy—The God That Failed: The Economics and Politics of Monarchy, Democracy, and Natural Order (New Brunswick, N.J.: Transaction Publishers, 2001), p. x.

³T.M. Ohashi, T.P. Roth, Z.A. Spindler, M.L. McMillan, and K.H. Norrie, Privatization Theory and Practice (Vancouver, B.C.: Fraser Institute, 1980).

⁴http://www.railserve.com/JJHill.html; I owe this citation to Sam Bostaph.

⁵Gabriel Roth (personal correspondence, dated December 20, 2002) points out that no one even contemplates privatizing elevators in high rises by distributing them piecemeal, one floor at a time divided by all the occupants of each floor. Not only are elevators not privatized in this manner, no one would think, either, of returning the entire elevator to the private sector apart from the building in which it is located.

⁶I refuse to employ the more commonly used expression “rent seeking.” Why use a perfectly good concept, rent, to describe something that is at bottom evil and vicious? Why not call a spade a spade? See on this http://www.mises.org/fullarticle.asp?control=385&month=17&title=Watch+Your+Language&id=19.

⁷Hans-Hermann Hoppe and Walter Block, “Property and Exploitation,” International Journal of Value-Based Management 15, no. 3 (2002): 225–36.