Private Cities: Does Honduras Prove That Libertarianism Doesn’t Work?

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I recently came across this article on Salon, which argues that a libertarian experiment that is going on in Honduras proves that libertarianism does not work. Frankly, I was only vaguely familiar with whatever is going on in Honduras, but the line of reasoning sounded to me a lot like the “well why don’t you go live in Somalia, then?” kind of argument.

Typically, arguments like this are just absurd straw men, like when liberals will point to the problems in the US health care system and say “See? Look how terrible the free market is!” So I began to do some research on the situation on Honduras to see if this is just another case of completely misunderstanding what libertarianism is or what free markets are.

So, what is actually going on in Honduras? In July 2011, the Honduran government amended their constitution to allow for the establishment of ZEDEs (Zones for Employment and Economic Development) with the intention of tackling poverty and improving the economy. There has been all sorts of legal drama with getting the project rolling, including an October 18, 2012 decision by the Honduran Supreme Court that the prior amendment was unconstitutional (on May 26, 2014, the new Supreme Court gave the ZEDE project their blessing). I’m sure there was some corruption and shady dealings involved in making this all happen, but here we are. It is not my intention to go through a complete history of how this idea is playing out in Honduras, but Brian Doherty at Reason has done a good job covering this here. As stated in an editorial in Honduras Weekly:

“It’s very important for all of us to understand, especially libertarians, that the new Honduran jurisdictions haven’t been designed to please the libertarian taste. The ZEDEs (or LEAP zones) are an experiment that aims to solve an [sic] social and economic crisis, to help Honduras overcome underdevelopment and fast-track the path to prosperity. If everything goes well, they will also serve as an example for the rest of the world, making Honduras a pioneer and reference point for an idea with huge development potential.”

It is critically important to note that these ZEDEs are semi-autonomous zones, sort of like Hong Kong is to China. They will still be considered a part of Honduras, but will have differing legal and economic systems. Basically, Honduras sells land to some investors, and then that land is no longer subject to the laws of Honduras or “protected” by Honduran police. The investors must establish their own government, contract out for their own police forces, and decide on whatever other laws the area will have. Note that other than the decentralized nature of the scheme, there is nothing inherently libertarian about it; some wealthy communists would be more than welcome to buy up land and set up their own communist utopia there. In addition, none of these ZEDEs have actually been implemented yet.

Enter Edwin Lyngar, author of the Salon article in question. If you actually read through his piece (and it is fairly short), you’ll see that he is speaking as though Honduras (all of it) is some kind of libertarian dream world. Never mind the fact that the actual ZEDEs have yet to exist, and never mind the fact that Honduras is one of the less economically free countries on the planet, as evidenced by their ranking 116th out of 178 nations in Heritage’s Index of Economic Freedom.

In other words, the entire basis of his critique rests on a complete lie.

Nevertheless, I think it is worth delving into Honduras a bit more deeply and to respond to a few of Mr. Lyngar’s specific points.

 

Critique Of The Critique: A Comedy Of Errors

Mr. Lyngar’s article is full of ridiculous inconsistencies and a clear lack of understanding of what libertarianism actually means. Consider his description of libertarianism, which he claims to have been an adherent of not long ago:

“In America, libertarian ideas are attractive to mostly young, white men with high ideals and no life experience that live off of the previous generation’s investments and sacrifice.  I know this because as a young, white idiot, I subscribed to this system of discredited ideas:  Selfishness is good, government is bad. Take what you want, when you want and however you can.  Poor people deserve what they get, and the smartest, hardworking people always win.  So get yours before someone else does.”

Most libertarians wouldn’t claim that “selfishness is good”, except in the context of the invisible hand. In that case, peoples’ selfishness does in fact lead to better outcomes. Even most liberals will agree with this to some extent.

The number of libertarians who would tell you to “take what you want, when you want and however you can” is zero. Not a one. If a “libertarian” were to say this, then by definition they would not be a libertarian. You see, stealing stuff is one of those little things that libertarians are in fact against. Gasp!

Unfortunately, some libertarians may say that “poor people deserve what they get,” but they are misguided. In my experience, it tends to be conservatives who would say things like this, and some of the more libertarian-leaning Republicans, but rarely libertarians. In the case of libertarians who say this, they usually would retract it within a couple months, when they become an anarchist and better understand the idea of crony capitalism.

No libertarian would say that the smartest or hardest working people (or most other adjectives) will always win. Those are certainly advantages, but it tends to be those who are most “alert” in the Kirznerian sense who we would say are most likely to “win” in business.

And libertarians don’t believe that the economy is a zero-sum game. You need not “get yours before someone else does.” Those who are most successful in a free market are those who create the most value for others, so “getting yours” means helping as many other people as possible.

Despite claiming to have been a libertarian, it is clear that Mr. Lyngar hasn’t the slightest clue what he’s talking about. Either that, or he is being deliberately misleading, which is far worse. Moving on…

“In Honduras, the police ride around in pickup trucks with machine guns, but they aren’t there to protect most people.  They are scary to locals and travelers alike.  For individual protection there’s an army of private, armed security guards who are found in front of not only banks, but also restaurants, ATM machines, grocery stores and at any building that holds anything of value whatsoever.  Some guards have uniforms and long guns but just as many are dressed in street clothes with cheap pistols thrust into waistbands.”

Let me get this straight: people find the government police scary and useless in protecting people, but private security is taking up the role of protecting things of value…and somehow, this is supposed to reflect poorly on libertarian ideas?

“The country has a handful of really rich people, a small group of middle-class, some security guards who seem to be getting by and a massive group of people who are starving to death and living in slums.  You can see the evidence of previous decades of infrastructure investment in roads and bridges, but it’s all in slow-motion decay.”

Bob Wenzel did a good job tearing this down. What are some major causes of income inequality? High minimum wages and oppressive regulations.

“Honduras has the most complex minimum wage laws I have ever seen. Take a look for yourself. As far as starting a business, the World Bank lists it as extremely difficult to do so in Honduras, with a rank of 138 out of 189 countries. Which is to say nothing about its ranking for Enforcing Contracts  (166).”

And Mark Lutter says:

“The basic problem is that Honduras, along with many other third-world countries, does not have functioning courts or police. Nor do they have basic rights to engage in commerce with others. If a Honduran wants to start a business, he must pay 39 percent of his per capita income, and he must wait 82 days to get the requisite construction permits. Economic growth is not possible without the creative destruction that comes with new businesses.”

And I’d like to add that the decaying infrastructure reflects the weaknesses of government, not of private industry. While on the subject of infrastructure, Mr. Lyngar effectively brings up the question that every libertarian knows all too well: but wut about muh roads?!?! Here he is describing his drive along some Honduran roads:

“The word “treacherous” is inadequate—a better description is “post-apocalyptic.”  We did not see one speed limit sign in hundreds of kilometers.  Not one.  People drive around each other on the right and left and in every manner possible.  The road was clogged with horses, scooters and bicycles.  People traveled in every conceivable manner along the crumbling arterial.  Few cars have license plates, and one taxi driver told me that the private company responsible for making them went bankrupt.  Instead of traffic stops, there are military check points every so often.  The roads seemed more dangerous to me than the gang violence.”

Yet again, as is so often the case in anti-libertarian polemics, Mr. Lyngar conflates government failure with market failure. This “post-apocalyptic” picture of the roads in Honduras is yet another demonstration of the failure of government to maintain adequate infrastructure. He continues:

“The greatest examples of libertarianism in action are the hundreds of men, women and children standing alongside the roads all over Honduras.  The government won’t fix the roads, so these desperate entrepreneurs fill in potholes with shovels of dirt or debris.  They then stand next to the filled-in pothole soliciting tips from grateful motorists.  That is the wet dream of libertarian private sector innovation.”

When the government fails, the private sector needs to pick up the pieces. While I’ve personally never had a wet dream about entrepreneurs filling in pot holes (although I’m sure there would be some great Freudian dream analysis of this), I do respect these instances where people who are clearly victims of government go out and try to make the best of a bad situation.

“A member of the small, dwindling middle class, Alberto objects to his city being labeled the most dangerous in the Western Hemisphere.  He showed me a few places in the city that could have been almost anywhere, a hipster bar, a great seafood place (all guarded by armed men, of course).  Alberto took me on a small hike to a spot overlooking the city and pointed out new construction and nice buildings.  There are new buildings and construction but it is funded exclusively by private industry.  He pointed out a place for a new airport that could be the biggest in Central America, he said, if only it could get built, but there is no private sector upside.” [emphasis mine]

Are you noticing a theme here? Time and again, the author is lambasting libertarians and their free market beliefs, yet pointing to evidence of how the government has been an utter failure and that the private sector is the only bright spot in the country. With regards to the airport, he seems to be ignoring the reasons why one might choose to undergo or withhold a huge investment project. Why is there no upside? Perhaps it would be too dangerous, and gangs would shoot down planes or destroy the infrastructure. If that is the case, then building an airport is clearly an idiotic idea, whether done by the private sector or through government investment.

Later on in the post, Mr. Lyngar begins to get more abstract and attempt to find some fatal flaw in libertarianism.

“One can dismiss the core of near-sociopathic libertarian ideas with one simple question: What kind of society maximizes freedom while providing the best outcomes for the greatest number of human beings?  You cannot start with the assumption that a Russian novel writer from the ’50s is a genius, so therefore all ideas about government and society must fit between the pages of “Atlas Shrugged.”  That concept is stupid, and sends you on the opposite course of “good outcomes for human beings.”  The closer you get to totally untamed, uncontrolled privatization, the nearer you approach “Lord of the Flies.””

There is very little substance here outside of the question he brings up. That being said, his question about how to devise an ideal yet practical society is seriously flawed. For starters, libertarians believe that a more libertarian society would be the answer to his question, so it is unconvincing. But more fundamentally, he is appealing both to maximizing freedom AND a utilitarian goal, and it is not clear that the two are compatible. What criteria is used to determine which of those two values wins out when they conflict? By definition, there must be an appeal to some third value which goes unmentioned. If not, then it would appear that he is just saying that utilitarianism wins (or maximizing freedom wins, but clearly this is not his point). And if that is the case, then we must dispense with the idea that maximizing freedom is relevant at all to his analysis. By the way, the “third value” I refer to above is in almost all cases “what I think is best” for any non-libertarian.

“Society should not exist to make a few people fabulously wealthy while others starve.  Almost all humanity used to live this way, and we called it feudalism.  Many people want to go back to that sort of system, this time under the label of libertarian or “the untrammeled free market.”  The name is irrelevant because the results are the same.  In Honduras, I did not meet one person who had nice things to say about the government or how the country is run.  My takeaway from the trip is that living in a libertarian paradise satisfies only a few of the wealthiest citizens, while everyone else thinks it sucks.”

Actually, Mr. Lyngar, the name is highly relevant, because feudalism and “the untrammeled free market” are entirely different things. Feudalism is one of those terms that doesn’t have a precise definition, not unlike “terrorism“. Here is one of the most popular definitions of the term, according to Wikipedia:

“The classic François-Louis Ganshof version of feudalism describes a set of reciprocal legal and military obligations among the warrior nobility, revolving around the three key concepts of lords, vassals and fiefs. A lord was in broad terms a noble who held land, a vassal was a person who was granted possession of the land by the lord, and the land was known as a fief. In exchange for the use of the fief and the protection of the lord, the vassal would provide some sort of service to the lord. There were many varieties of feudal land tenure, consisting of military and non-military service. The obligations and corresponding rights between lord and vassal concerning the fief form the basis of the feudal relationship.”

The vassal performs military service in exchange for a piece of land, and the peasant/serf worked the land in exchange for protection. In what way does this have any relation to the free market? The free market is just the absence of restrictions upon trade and production. Mr. Lyngar is comparing apples and oranges.

He also claims that no one had positive things to say about the government, as if this somehow is an argument against libertarianism. Typical. In the final paragraph of an otherwise incoherent mess of an article, Mr. Lyngar says something that is on the money:

“There can be no such thing as freedom, safety or progress of any kind, when an entire society is run for the benefit of a handful of rich assholes and global conglomerates.”

Maybe the author is a libertarian after all!

 

Can Private Cities (ZEDEs) Save Honduras?

Now that I’ve thoroughly rebutted Mr. Lyngar’s childish critique of libertarianism, it is time to turn to the actual (and far more interesting!) political changes that Honduras is in the process of implementing. Before demonstrating why the idea of private cities would be incredibly beneficial, let us first set the scene of modern Honduras. According to Brian Doherty:

“The small Central American nation, wedged between the Pacific Ocean and the Caribbean, is the murder capital of the world, with the U.N. reporting over 80 homicides per 100,000 people in 2011, compared to slightly over 30 in Colombia and under 10 in the United States. Its average annual income of $4,300 per capita is below that of the Congo. According to the U.S. Agency for International Development, 65 percent of its people are living in poverty. The World Bank ranks Honduras 125 out of 185 on its “ease of doing business” list, below Uganda.”

This data is from a couple years ago, but not much has changed. According to the CIA World Factbook, Honduras:

  • is the 2nd poorest country in Central America
  • had a per capita GDP (purchasing power parity) of only $4800 in 2013
  • under-employs about one third of the population
  • has a poverty rate of 65%
  • has a life-expectancy at birth ranked 147th in the world

Furthermore, Honduras has been ravaged by the US government’s War on Drugs, which is largely responsible for the absurdly high murder rate and drug cartel power. It has also been a major factor in the endemic corruption within the Honduran government.

In other words, modern Honduras is not a pretty picture (other than the beautiful landscapes, of course). This is the environment that the ZEDE experiment is entering. There is no guarantee that the experiment will be a success; it is not unreasonable to think that, considering the rampant corruption, it is possible that the ZEDEs will be used to enrich the already wealthy politicians and their friends. Only time will tell if the ZEDEs will actually help lift the masses of Hondurans out of poverty; a poor implementation of this experiment is likely to fail.

But if the ZEDE experiment is implemented properly, we have every reason to believe that it could be just as successful as Hong Kong was at lifting huge numbers of people out of grinding poverty, even in a fairly short period of time. And considering how Honduras is already so poor and in such bad shape, there really is very little to lose by trying.

The Advantages Of Private Cities

I have already described the moral reasons why the freedom of association that private cities can bring would be massively beneficial (see: Do You Have Opinions About Things? Then You Should Be An Anarchist). If you want a more theoretical justification for the morality of this type of arrangement, that article is the place to be. For our purposes here, I will be focusing on the more utilitarian, material benefits of private cities.

There are three primary advantages that private cities have over government owned cities:

  1. Privatizing cities will help “internalize” externalities and provide “public goods” in a superior fashion,
  2. Private cities are less at the whim of interest groups, and
  3. Private cities are more likely to serve the poor

Most non-libertarians would find each of these advantages surprising, so I will explain each of them in turn.

Internalize Externalities And Superior Provision Of “Public Goods”

Externalities are one example of something that many consider a “market failure“. They occur when the total social cost of some action is not contained within the monetary cost of the action. The most common example would be pollution; when a factory pollutes, they do not bear the cost of the pollution – it is disbursed over the people who are harmed by the pollution. As such, as the theory goes, the factory will end up producing more than the socially optimal level, because the cost of pollution isn’t factored into their production process.

Without going into too much detail about this theory, I claim that this externality is the result of a lack of private property. The pollution is actually a violation of the property rights of the victims of the pollution. If these people could make a legal claim that the factory has infringed on their property rights, the externality would be internalized. A more thorough discussion of this will need to be saved for another time; for now, let us restrict this discussion to the benefit of private cities in this regard.

Similarly, a “public good” is one that, as the theory goes, would not be produced in optimal levels by the free market. These include things like utilities, national defense, police, and so on. When you get down to it, both so-called public goods and externalities are very similar “problems”. In both cases, private property is the solution.

Consider a mall, which is typically owned by a someone who rents out space as their source of income. The mall owner has a very strong incentive to increase the value of the space in this mall and thus collect a larger income. How can they do this? By providing “public goods” such as security, parking, and nice open spaces within the mall. Each individual store owner may not have much of an incentive on their own to provide security, but the owner of the mall may find it necessary in order to get people to rent out space.

Private cities can do something very similar. If a private company is tasked with developing a profitable private city, they have an incentive to provide quality schooling, security, parks, roads, waste disposal, etc. All of these services will increase the value of the land that this company owns, and will thus increase its own revenue.

But publicly owned cities have no comparable incentive. Yes, a government that does a poor job could potentially get voted out of office, but this is still far less responsive than that of competing private cities. This is why roads tend to be shitty almost everywhere (not just in Honduras!), and why police can get away with murder and abuse fairly easily.

It’s hard for people to imagine what private cities would look like, which is understandable. Probably the closest examples of this kind of arrangement are Letchworth and Welwyn, which were small cities founded on Georgist principles. They were nationalized after World War 2. You can also kind of consider Disney World in the same vein. Another approximation of a private city would be that of Sandy Springs, Georgia, which outsourced most of its public services to private companies after going bankrupt, which improved these services at a lower cost. Note that this is still a far cry from actual private cities, which would provide public services even better than mere outsourcing would.

Less Influence From Interest Groups

Public cities are basically tools of interest groups.

There is a huge incentive to lobby the local government to enact rules that would help certain businesses at the expense of others, and of the common welfare in general. It is also far more likely to lead to policies that are simply dumb and self-destructive.

Rent control is a perfect example of a horrible policy that nearly all economists agree will basically destroy a local economy, but many cities will implement rent control laws because they sound nice. Zoning laws can be used by certain businesses in order to harm their competition by making their rent more expensive, forcing them to move, and preventing them from existing in the first place.

The most obvious case of interest group domination is the current battle between Uber and various local taxi cartels all over the world. Many cities are banning Uber, which generally provides superior service at much lower cost, in order to appease the powerful local taxi services.

In private cities, while anything is possible, there is a strong incentive not to implement stupid policies. If there are two competing cities, one with rent control and one without, the city without rent control will almost certainly be more successful (i.e. profitable). Similarly, zoning laws could be implemented, but the city owner will need to pay for whatever cost this imposes upon him, unlike the public city, which can rob the taxpayers to pay for it. So if one private city implements zoning laws that ban strip clubs, for instance, the owner will pay the cost of this decision (residents who like strip clubs won’t want to live there, etc.) as well as reap the benefits (more socially conservative people will want to live there, etc.).

Private Cities Help Serve The Poor

This is surely the one that would most surprise readers. Most people imagine that private cities will become tyrannical little enclaves of the rich trying to escape or take advantage of the poor. And most certainly, some would in fact be like this.

But when you consider how terribly American cities are treating their homeless people, it amazes me how this idea persists. Capitalism is about mass production; while there is certainly a market for serving the wealthy, there is a much larger market and plenty of profit to be made serving the middle and lower classes.

Wealthy communities tend to already have high property values and quality provision of public goods. But the potential for profit from serving lower income communities is drastically higher. Land value is cheap in poor communities, and has much more room for growth.

How could private cities better serve the poor? For one thing, a regime of several competing private cities will drive the cost of living down as the cities compete for residents and investment. This benefit cannot be overstated, because the amount of fraud, waste, and abuse in many cities is extraordinary, particularly in the third world.

It’s also highly unlikely that private cities would “exploit” the poor, considering the fact that in most proposals, the land that forms the city is largely uninhabited. Poor people aren’t going to be forced to move there and be exploited (unless, of course, the government forces them). On the contrary, a major benefit of private cities is that they will have better rule of law than the more corrupt areas of the country, which gives poor people a more safe and stable place to migrate to.

And private cities need not be run by “evil corporations”. They can experiment with social and legal rules. Some of them could mimic the Israeli kibbutzim, if socialism is more your cup of tea.

 

Conclusion

In short, the experience of Honduras in no way proves that libertarianism doesn’t work. The proper lessons to be learned from the Honduran experience are primarily about the incredible failure of some governments to provide good institutions that create a healthy economy and social system.

Honduras is in the process of implementing a project that is akin to the formation of competing private cities, and if implemented well, should lift many poor Hondurans out of poverty. Hopefully corruption and cronyism doesn’t ruin the experiment. Ultimately, only time will tell.

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