Interview with Fred Foldvary

I have written before about the ideas advanced by Fred Foldvary - geo-libertarianism.  This concept develops and advanced ideas of Henry George regarding a land tax as the single source of taxation for what are commonly referred to as public goods.

I wish there was a better word than "tax" for this, as it suggests, inherently, coercion.  Foldvary develops this concept along the lines of contractual relationships between the homeowner / property-owner and the developer of the community.  Think of governance provided via a voluntarily-joined home-owners-association type community.

Using only a little imagination, the concept can certainly be stretched to embrace minarchism and even much of anarcho-capitalism.  For this reason, Mr. Foldvary's work deserves the hearing of a larger audience.

In any case, as mentioned, I have written extensively about this concept in the past so I will not repeat it here.  However, Marc Clair at Lions of Liberty has recently interviewed Foldvary.  It is worth a listen.

Towards Consensual Governance

This is the title of the final chapter of Fred Folvary’s book, “Public Goods and Private Communities.”  I have covered the basic aspects of his theories here and here.  In this post, I will outline his summary and offer some closing thoughts of my own regarding this idea.

As mentioned in my previous post, Foldvary offers several case studies that demonstrate aspects of the possibility of private provision of public services.  No one example offers a complete picture – each example offers a reality of one or a few aspects of the theory. 

One point that he mentioned in several of the case studies was that, in order for people to implement their version of private community, existing regulations had to be swept aside in some manner.  It was the government sector’s rules that ensured the monopoly of the government sector. 

The example of Walt Disney World [WDW] in Orlando is illustrative:

Having obtained the land, Disney now needed self-government to fulfill his vision for WDW as a proprietary community.  On 15 November, 1965, Disney representatives met government officials at Orlando to discuss zoning and other laws, Disney’s commitment being contingent on reaching an agreement…. The circuit court approved the request for a separate drainage district….

The Reedy Creek Drainage District (RCDD) was formed in May 1966 under Chapter 298 of the Florida code…enabling WDW as landowner to control the environment and construction…. In 1967, Florida enacted Chapter 67-764 (House Bill No. 486) for the benefit of the Walt Disney Corporation…. The new law…‘abrogated nearly all state laws’ concerning building and development.

Foldvary suggests that the rules of the game must be changed.  He cites Buchanan, suggesting that changes below the (small “c”) constitutional level (whether this consists of electing better politicians or changing the laws) will be inadequate, because these will be “thwarted by the incentives that lead to dysfunctional outcomes.”

Such constitutional rules include: (1) those which prescribe the governance structure, (2) those which prescribe the behavior of the members, and (3) those which prescribe the powers of the organization.

Constitutional reform begins with an awareness of the meta-constitution, the ethical framework in which the constitution itself is created.  This ethical basis cannot itself be an agreement, since it sets the foundation for agreements.  This ethic was derived in Chapter 5 as what Locke called a ‘law of nature’, based on the premises of human independence and equality.  Such a fundamental change is not impossible.  Historical examples abound, including the American revolution and movements such as the abolition of slavery and equal rights for women.

Foldvary recognizes that the ethics of the people must be addressed if fundamental change, in the form of three amendments to a constitution, is to be enacted.  He looks to Locke for the basis:

The first, regarding the behavior of the citizenry, could be the codification of the Lockeian universal ethic: Any act which does not coercively harm others shall not be restricted, any state interest notwithstanding.

The second fundamental amendment regards the power of the state:

It would eliminate the taxation of individuals and firms by all levels of government, eliminating the mining of private wealth.

Foldvary goes on to describe the necessity of individual secession as the ultimate check on a government not following the rules, moving on to a third structural reform:

…one that would permit entry and exit into the government business itself, underpricing the cartel.  It would permit any person or organization having a title to land to withdraw the site from any government jurisdiction and create its own governance….an exit option helps maintain the post-constitutional enforcement of constitutional rules.

Foldvary concludes:

The theory presented in Chapters 1 to 8 presents the proposition that territorial public goods generate rents, and, if an organization has ownership rights to the sites on which rents arise, the rents reveal the demand for the goods and provide the means to pay for them.

The primary hypothesis – that incentives for personal gain do not in general induce private agents to provide the public goods that the people in the service domain effectively demand, because there is no way to induce individual users to each pay for a portion of the good – has been rejected…. Since the issue is the feasibility of private provision, the existence of the case study communities is sufficient to reject the hypothesis of market failure.

It seems to me that Foldvary has done a very good service with this idea as represented in this book.  He takes the best feature of the system of land value tax as proposed by Henry George, while eliminating the worst (i.e. where land should be common property), thereby developing it into a fully voluntary possibility, one that can be disciplined by the market.

Ultimately, the payment by the landowner is directly tied to that item that most directly benefits from community goods – the land.  Good streets, lighting, recreational facilities, security, etc.  Several such cooperatives can contract together for other services – broader security issues, for example.

Foldvary’s concept ties incentive for the entity providing the services to meet market desires at prices that offer value to the customers.  It offers the possibility for dissatisfied customers to withdraw consent – by not paying for services, joining a different cooperative, or moving without an exit liability and without requiring permission.

It allows for community pressure to be used as the means to motivate non-payers and free-riders to pay.  Not force, but peer-pressure. 

Folvary’s work deserves wider discussion and dissemination within the dialogue of the free-market, libertarian community.  I hope to have done my small part in this.

Hotels and Consensual Government

I am continuing through the book “Public Goods and Private Communities,” by Fred Foldvary.  In this book, Foldvary examines and develops private, contractual means to secure and deliver what many consider to be “collective goods.”

Foldvary distinguishes the contractual community from the sovereign community:

In a contractual community, a member enters into a contract with the other free agents, and the contract provides for the ability of a member to withdraw.

In a sovereign community, unless individuals are legally independently sovereign, the membership is not contractual, since the sovereign agency may impose laws upon the member without his explicit agreement.

He identifies the litmus test for a true, contractual community:

Only when the right of individual, personal secession is constitutionally acknowledged is the membership contractual.

The member must always hold the right to personally secede.  Not to secede only with a sovereign’s permission; not to secede only for a good reason; not to secede only if he has a new place to go; not to secede only after paying an exit tax; but to secede when and if he chooses with no obligations remaining or imposed beyond that which was explicitly agree to initially..

He calls out Paul Samuelson, in his view of the delivery of collective goods:

The proposition by Samuelson and others that provision of collective goods requires government overlooks…the fact that governance can be accomplished by the contractual means as well as by an imposed political process.

As noted in my earlier post on this book, Foldvary argues that the world need not be as simplistic as Samuelson suggests, and in fact is not as simplistic as this – there are many examples of contractual communities that can be looked at as models or templates, presenting concrete examples subject to further practical development.

Foldvary notes the work of Spencer Heath, and his main work, “Citadel, Market and Altar,” appearing shortly after Samuelson’s work noted above.  This work, not surprisingly (given the viewpoints), did not attract the same academic attention.

…Heath wrote that the value of public services is manifested as the rent ‘which attaches to exclusive locations in proportion to benefits received by or at those locations.’ 

In other words, the better the services, the higher the potential rent.

This central idea he obtained from Henry George….But…Heath turned George’s political paradigm on its head.  Whereas George regarded the landowner qua landowner as a passive receiver of rent which he has no part in creating, to Heath the landowner as an entrepreneur has the potential of becoming a ‘producer of and restorer of land values.’

Heath saw this in this an entrepreneurial possibility, where the landowner had the opportunity to increase his rent and therefore his profits by becoming a more efficient provider of more valued services.

…Heath adds, ‘the balance of the rent not required for [public services] will be the clear earnings of the proprietors who have administered and supervised the enterprise.’

Heath offers as an example, the hotel:

‘In a modern hotel community…the pattern is plain.  It is an organized community with such services in common as policing, water, drainage, heat, light and power, communications and transportation, even educational and recreational facilities such as libraries, musical and literary entertainment, swimming pools, gardens and gold courses, with courteous services by the community officers and employees.’

Courteous services…by the department of water and power.  That is a novel concept.

Unlike sovereign governance, proprietary administration is subject to a market discipline.  As Heath put it, ‘the slightest neglect of the public interest or lapse in the form of corruption or oppression would itself penalize them by decline in rents and values.’

Spencer Heath MacCallum carries further the work of his grandfather:

‘The hotel has its public and private areas, corridors for streets, and a lobby for its town square.  In the lobby is the municipal park with its sculpture, fountains, and plantings… its public transportation system, as it happens, operates vertically instead of horizontally.’

The entire organization of a hotel is based on contract, some explicit, some tacit.  Employee agreements, guest agreements, and articles of incorporation: these would constitute the constitution of the hotel and define the law.  Such is the root of contract law: not to be found in a search of law regarding contract, but in the medieval ‘law’ which contracting parties bring into existence by their agreement.

It is clear that the agreements and contractual structures governing guests and employees of a hotel do not address every issue taken on under the term “government” as understood today.  For this reason, Foldvary develops several case studies, broadening the concept with actual examples of contractually-based communities.

The second half of Foldvary’s book constitutes these case studies, casting the net farther and wider than the example of the hotel. For these, I will quote extensively from his summary of each study:

Walt Disney World was selected as an example of a proprietary community.  Although typical of resorts and hotels, its autonomous legal status makes it a prime case study for the commercial provision of collective goods.

Arden Village was chosen as a prime example of a community financing its collective goods from site rents on privately owned land.  It also demonstrates a high degree of voluntary activity.

Fort Ellsworth is an example of a condominium, a common type of contractual community which provides a limited range of goods, and implements the economic principles of funding them from rent.

The Reston Association is an example of a large civic association, resembling a sovereign town, demonstrating that such large-scale operations can be run as contractual communities.

Finally, the St. Louis ‘private places’ show how neighborhoods within a metropolitan area have associations which own the streets and utilities, providing protection and a sense of community.

Together the case studies demonstrate the feasibility of contractual governance and the provision of civic goods under different conditions, each being an example of a more general type of community.

I may write further on this general topic from the case studies.  However, my purpose is not to cover the book in its entirety, but to present his work as a model for contractually organized communities.   For me, the key takeaways include the idea that the relationships are voluntary and that the structure can be disciplined by market forces via profit and loss.  I can imagine associations of many small groups coming together for certain needs (broader defense, for example), and remaining independent for others (streets, community parks, etc.).

I find Foldvary’s work to offer real food for thought, worthy of consideration in the dialogue of voluntary governance with the individual in control of his agreements and relationships.  Whether or not I write further regarding the book, I will at some point offer another post on this topic, summarizing my views on the possibilities.

And for those who say there is no example today of a society governed purely by voluntary means, I will now offer the hotel as my counter.

The Market Provision of Social Services

The Market Provision of Social Services

The title of this post is taken from the book “Public Goods and Private Communities: The Market Provision of Social Services,” by Fred Foldvary.

Who is Fred Foldvary?

Fred Emanuel Foldvary (born May 11, 1946) is a lecturer in economics at Santa Clara University, California, and a research fellow at The Independent Institute. He is also a commentator and senior editor for the online journal The Progress Report and an associate editor of the online journal Econ Journal Watch. He lives in Berkeley, California.

In his PhD dissertation (George Mason University, 1992), "Public Goods and Private Communities", he applied the theory of Public goods and Industrial organization to refute the concept of market failure, including case studies of several types of private communities. His research interests include ethics, governance, land economics and public finance.

His support of geoanarchism (a kind of Georgist economics) and his advocacy of civil liberties, anarchy and free markets have gained him a place of high visibility in the geolibertarian movement. [1] In 2000, he ran for Congress in California's 9th District as a Libertarian. [2] He received 3.3% of the total vote to finish third among the four candidates on the ballot.

One of the things I hope to discover as I further my reading of Foldvary’s volume is to what extent Foldvary associates with at least some aspects of what is attributed to “Georgist economics.” 

In his publication Progress and Poverty [Henry] George argued that: "We must make land common property."[4] Although this could be done by nationalizing land and then leasing it to private parties, George preferred taxing unimproved land value. A land value tax would not overly penalize those who had already bought and improved land, and would also be less disruptive and controversial in a country where land titles have already been granted.

By the term “taxing unimproved property,” it is meant to tax all land as if it was unimproved – unlike the typical real-estate property tax of today, which taxes both land and improvements.  In other words, the economic benefits of the improvement would belong to the property owner, while the economic benefits of the improvement in land value would belong to the state to spend or otherwise distribute.

However, the term “taxing” suggests coercion in the relationship.  I don’t believe Foldvary envisions this as a system to be administered by a coercive state agent:

The real world distinction is not community organization versus lack of organization, but what kind of governance or organization an enterprise or a community has, for example consensual governance versus imposed governance.

It is this bent of Foldvary’s – that the relationships must be consensual – and that I could envision the entire process (from street-sweeping all the way up to the big bogeyman of national defense) as being formed in the free market by enterprises driven and disciplined by profit and loss that I chose to look into his work in more detail: a form of homeowners association, acting independent of other like organizations for certain matters and cooperating with other similar organizations for others.

Geo-Rent: A Plea to Public Economists, Fred Foldvary

This article can be found in PDF form via a Google search.

I read the article at the encouragement of Ingo Bischoff. I "met" Ingo through our posting at The Daily Bell.

I will offer a brief summary of the article, and a few thoughts. Of course, errors in my summary, if any, are my own.

"The idea is to tax the market value of land, exclusive of the value of improvements."

This is the basic idea of taxation, as presented by Foldvary. The idea is that, through "public" services / expenditures, it is the land value increase that best reflects the ultimate value and efficiency of the "public" improvements. Therefore, it is the land value that should bear the burden of paying for the services. (Here you have my stumbling explanation of Foldvary's eloquently stated idea.)

It is an intriguing idea. Set aside my distaste for any form of taxation (it is theft, after all), the idea of a land value tax has a nice ring. To the extent roads, sidewalks, security (including national defense presumably), public spaces, provide utility, they do so to a given geographic location and inherently make that land underlying the location more valuable.

The tax follows the location, not the person. To the extent an individual feels unfairly taxed (and to the extent that this land value tax replaces all other forms of tax), it is quite easy to avoid paying the tax - sell the property and leave the jurisdiction.

Another possibility comes to mind, however I will admit I have not thought it through....

It would seem that this idea is quite conducive to eliminating (at least greatly reducing) government from the equation. Certainly a private enterprise would be motivated to improve the land value via providing market-demanded benefits in the most cost-efficient means possible.

Localities (cities? counties?) could regularly bid out the contract, with a predetermined tax rate and / or the tax rate to be submitted as part of the bid. Assessments would also be preformed by a third party. Basic services could be outlined in an RFP/RFQ process. The possibility of the service provider being kicked out at the end of the contract term (due to poor service or other reasons) would help motivate toward better performance, and bankruptcy does not automatically have to be paid for by the "customers" (as opposed to the tax-payers always being on the hook.

As I said, I haven't thought it all through. But it is an interesting concept.

I thank Ingo Bischoff for writing and advocating a read of this concept.