On the weekend I attended an event at the Australian Institute of Architects (AIA). I walked out concerned about the future of our cities. Disclaimer: I am not an architect or a town planner; I am an economist. However the points in this article are general in nature and stem from literature around regulatory capture, public choice theory and rent-seeking. The fact that these theories rarely enter the town-planning discussion is precisely my motivation.
The two broad points I make below are connected. First, that the institutional structure of our architecture and town planning industries have generated a perfect storm of rent-seeking. By rent-seeking I mean private agents using the tools of the political process to gain additional profit (rent).
And second, that the debates over planning and zoning regulations make the fundamental mistake that our the decision is between either central planning or no planning. This is not a debate over whether to plan, or not to plan. The question is who should do the planning: should it be individuals or should it be regulators?
Be warned, this is a fairly long post. So if you read no further, then just remember this:
‘True art is always spontaneous and can never adapt itself to the dictates of a public works commission.’ – Elisee Reclus in Anarchy, Geography and Modernity
Architects and planners have a love-hate relationship. On one hand architects have a distaste for planners because they make their jobs harder–rejecting plans, constant changing and ambiguous enforcement of rules, achieving impossible sustainability stars, and so on. But on the other hand, town planners don’t like architects because they constantly break their prescriptive rules and yell at them in public.
But telling this as a hate story misses the point. They also love each other. This is a symbiotic relationship because of the unique institutional characteristics of the industry. Let me muse over a few of these interesting aspects:
Architect is a protected title: It is against the law to refer to yourself as an ‘architect’ where you have not passed a certain level of requirements. These requirements are overseen by various jurisdictional boards (in Victoria, for example, there is the Architects Registration Board of Victoria [ARBV]). These boards are constantly lobbied to increase the entry requirements. This is a problem because protected titles mean barriers to entry. Restricting the use of the label ‘architect’ decreases the supply of architects. This increases the average wage in the industry. Yes, this is economics 101.
Of course, there are some possible arguments for registering professions. But these must be weighed up against the tendency for the barriers to rise higher and higher in the name of the ‘public interest’. Currently, Architects in Australia must endure an excessively lengthy and costly process: an approved degree; 3300 hours of architectural practice experience; a national examination paper; and an examination interview. Following this arduous process–extending over approximately 7 years–architects are rewarded with compulsory registration fees for the remainder of their career. Why would architects want it to be so expensive? It may at first seem surprising that these weighty tasks are placed onto architects by lobbying architects. But there is an obvious reason; once you pass the registration you are granted the right to use the title. You have jumped the barriers to entry and now you are inside them. A small fee is not your friend; preventing those pesky grads from stealing your work. This whole process makes the architecture pie bigger, it also splits it between fewer people (‘registered’ architects).
Architects earn commission based on build cost: While this is worth noting, it is not dissimilar to other industries (more on that with the next point). I am not suggesting that this is a problem in itself. But what commission-based work means is a classic principal-agent problem. That is, an architect is engaged in a project where their job is to serve the interests of their client, but their private incentive is to blow out the budget. It must be clear I am not suggesting that architects are bad people (I know many quite well). I am simply stating that people have been known respond to incentives; and the incentive on a commission-based project is increase the cost on which the commission is based.¹ There are a number of ways to ameliorate this problem. For example, by agreeing to some fiduciary duty when registering. However it is of course hard to prove that an architect has broken this duty in such a value-subjective profession (by picking a more expensive facade, for example). It is even harder to prove when they achieve that increase in build cost not through their direct actions but through lobbying and indirectly molding the regulatory environment.
Build cost is a function of regulatory prescriptions: It is not controversial to suggest that the building cost is some positive function of the regulatory prescriptions on the building process. Regulations do not make processes cheaper; regulations make projects more expensive. Prescriptions on buildings–including sustainability stars, window facings, minimum sizes and so forth–make those buildings more expensive. Higher costs means higher commissions for architects. Note that there is also the second aspect that making the process more complicated may mean that there is higher demand for architects simply due to the complexity of the process.
The story looks something like this:
- Architects are protected by occupational licensing barriers to entry;
- These barriers decrease the supply of architects, raising their wages;
- Regulators make rules because that what they are taught to do–they are trained to intervene–and the more they intervene the more town planners are justifiably funded through the public purse;
- These prescriptive rules increase build costs by complicating the process; and
- Architects make money off commissions based on those build costs.
This is a particularly poignant example of the theory of economic regulation coming from Stigler 1961 and Peltzman 1976. The crux of these two papers is that there exists both a demand and a supply of regulation. A mutually beneficial exchange can occur between the regulators and the regulated. What I am suggesting here is that the architecture and town planning professions have created an elaborate exchange. The architects need rules and barriers to keep their profession exclusive; planners need to regulate to keep their jobs. Let me provide a few examples (it is clearly easier to provide examples of the demand side of this equation because those are easily observable through lobbying).
Earlier this month a new ruling in NSW increased the minimum size of apartments. The ruling cited NSW’s State Environmental Planning Policy 65 (SEPP 65). These guidelines were introduced as the brainchild of former Senator Bob Carr. The ruling increased the minimum apartment size guidelines (by . This even went above and beyond the apparent industry ‘rule of thumb’; enforcing the minimum apartments sizes to the stricter level set out in the guidelines. There is almost no need for me to explain the pitfalls of this plan. The result will be higher house prices and a lull in the innovative use of space. This comes at a time when Australia faces a housing affordability crisis. See the telling graph below by a colleague of mine at the Institute of Public Affairs, Mikayla Novak, on the number of years on the average wage needed to purchase a median-price capital city house:
But this most recent ruling is on the more modest end of recommendations of the Australian Institute of Architects. The national president of the AIA recently called for the ‘mandatory use of architects for the design of certain types of buildings.’ That’s right, not only do they want to limit the number of architects, but they want to be the intermediary on all transactions. This is like protecting the title of financial planners and then saying every time you make a credit card transaction over $1000 you have to engage with them. Moreover, there are also calls in SEPP65 for mandatory ‘expert’ peer review panels. This is absolutely ludicrous rent-seeking at its finest. Nevertheless, as would be expected, the rhetoric is not about rent-seeking. Rather, there is a elaborate facade of optimism. Sustainability. Family. Community. The list goes on. While it is not obvious at first, the grounding of these arguments are deeply pessimistic. It is pessimistic because the implicit assumption is that individuals cannot be responsible for their own decisions. Mandating the design of building–such as the number of windows or minimum floor size–is suggesting that individuals cannot plan for themselves. It’s saying people do not know what is best for them.
But this simple mistake has terrible ramifications. The problem is that the planning problem is given as a dichotomy between central town planning or no planning. But this is not the case at all. This is not a debate about whether we should plan or not. It is a question of who should do the planning and through what institutions. F. A. Hayek spoke of this question in 1945:
“[the] question which arises here, that of who is to do the planning. It is about this question that all the dispute about “economic planning” centers. This is not a dispute about whether planning is to be done or not. It is a dispute as to whether planning is to be done centrally, by one authority for the whole economic system, or is to be divided among many individuals. Planning in the specific sense in which the term is used in contemporary controversy necessarily means central planning-direction of the whole economic system according to one unified plan. Competition, on the other hand, means decentralized planning by many separate persons.” Hayek (p520, 1945)
The rhetoric around planning plays out as if the city would decompose into some chaotic anarchy without specific zoning and planning laws. That for some reason if we don’t dictate the minimum size of apartments then people will start living in homes that are too small for them. And that the government explicitly knows what house is too small.
But this chaotic outcome simply has no evidence. In fact, there is some significant evidence to the contrary. The US, in some sense, has provided us with a huge range of data from effective natural experiments in planning and zoning laws between the states. Zoning is controlled by the states and we have many years of data of house prices and such that can be compared against each other. What comes out of the data is that the more lenient (or absent) zoning laws–remember, individual planning rather than central planning–have produced more affordable housing and more innovative and growth friendly environments (see this on Cato).
The most popular example of this spontaneous order in town planning is of course Houston, Texas. What has happened in Texas is a natural and organic form of order. It works because cafes want to be near cafes. Factories want to be near factories. And so forth. Of course there have been some blunders. However what must be remembered–although can never be measured–is the huge savings from having no regulations. Also, don’t forget about the burgeoning phenomenon of private cities such as Guragon, India, where planning is entirely privatised (see a chapter by Rajagopalan and Tabarrok, or an econtalk podcast here). The lesson–time and time again–is that planning decisions are between the individual and the state, and that individuals outperform states.
Disclaimer: the event had $4 drinks subsided by the annual fees. I may go back for more next month.
¹ Note that the alternative is to increase your commission per cent; an approach the AIA did attempt by colluding fees across the industry. While these were never compulsory–taking the form of recommended fees provided to those looking to be entered into the profession–there was a significant case for price fixing and were later removed.