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10 September 2005
State failure in New Orleans and the free market alternative

My argument is that freer is better.  So, how might that apply to New Orleans?

I should begin by stating that I don’t think that individuals and companies acting in the usual way would work.  Every landowner building his own levee could get rather expensive.  And what’s the use of a great levee if your neighbour’s property turns into a foul-smelling toxic swamp?  No, you’re going to need some kind of super-landlord.

Imagine that New Orleans had never existed.  Imagine also that the state chose to do nothing other than enforce contracts.

New Orleans Inc (NOI, the super-landlord) is created.

It asks the question - is it worth it?  Let’s assume the answer is yes.

It buys the land it feels it needs.

It erects levees

It then sells leases on the land inside those levees.  The contract will be something along the lines of: you pay us a sum of money (a ground rent) each year and in return if your land floods we will pay you some sum in compensation.

What happens?

NOI will make damn sure that the levees are fit for purpose.  Why?  Because the costs of compensation will be enormous and a huge deterrent against getting things wrong.

Oh, but they’re insured.  Yes, they will be but on what basis?  Insurers are going to look into this carefully.  They don’t insure for free.  If they do, they go bust.  They will ensure that their likely pay outs are less than their premiums.

But what if NOI gets it sums wrong or conditions change like, for instance, as happened, the Mississippi started to rise?  You would have to write into the leasehold contracts some sort of clause stating that if the ground rent ever increased NOI would offer to buy back the property at some sort of market price (that being the market price before conditions changed, of course).

But who would decide this market price?  Initially NOI would make an offer.  The leaseholder would be free to accept or reject it.  If he felt it was too low he would be free to pursue his case through the courts on the grounds that NOI was in breach of contract.  That’s the state’s courts, by the way.  Remember, enforcing contracts is the only thing the state does.

But that would be far too expensive for most landowners, wouldn’t it?  Not necessarily.  Not if they go down the class action route.

But all this is assuming that New Orleans hadn’t already been built.  Would this still work under current conditions?  I don’t see why not.  Again it is a question of buying up the land.

But what if someone won’t sell?  NOI doesn’t have to buy everything - just enough to make a reasonable profit.  There may well be a few hold outs but they’re not that big a problem.

But if there are a few hold outs won’t that encourage everyone else to hold out in the hope that they get a free ride?  Possibly.  What NOI would have to do is to buy options to buy (if that is not too confusing).  They would approach every landowner and ask them at what price they were prepared to sell.  They would then draw up an option to buy the land at that price.  Obviously, they would have to pay out some money for this privilege.  Then, having got all the options, NOI could decide which properties they wanted to buy and whether it was still worth it - in just the same way they would have done if New Orleans had never existed.

OK, that’s the theory but what about the practice?  Er.  I am not aware of too many examples either of success or failure.  Why?  Probably because the state never leaves alone for long enough to allow these sorts of things to develop.  The Voluntary City gives the example of the Chicago Central Manufacturing District.  There are plenty of privately-run gated communities in the United States.  It would be interesting to know how the reclaimed parts of the Netherlands and Eastern England were organised. 

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