Welcome to the New—and Private—Neighborhood

Local government in a world of postmodern pluralism

Local government has been increasingly privatized since the 1960s. I don't mean government services; I mean government itself. In 1965 less than 1 percent of all Americans lived in a private community association. By 2005, 18 percent—about 55 million people—lived within a homeowners association, a condominium, or a cooperative. Since 1980 about a half of all new housing units in the U.S. have been built within such associations; in California, the figure now is at least 60 percent. Such communities can be as small as a single building or as large as an entire city, but they're often about the size of a neighborhood.

This shift came as we entered the postmodern era, a time of increased suspicion toward the conventional narratives of scientific and economic progress. There is less convergence of basic beliefs about the best forms of society and less expectation of such a convergence. Instead, there is a preference for pluralism—for multiple, overlapping identities and communities through which individuals can find meaning and comfort.

Such trends augur well for social institutions, such as neighborhoods, that once played a larger role in Western society. Yet these will still have to exist within some broader political and economic framework. It's far from obvious just what shape such an order might take, but it is likely to mark a return to the local independence that characterized the West before the rise of the modern nation-state.

The Private City

The legal scholar Gerald Frug proposed one postmodern model in 1980. Writing in the Harvard Law Review, he called for "a genuine transfer of power to the decentralized units"—regions, cities, and neighborhoods—of American society. One element of this decentralization, he wrote, would be to recognize "the rights of the city as an exercise of freedom of association." This recognition would revive the premodern idea that cities were the legal equivalent of business corporations and "there was no difference between a corporation's property rights and its rights of group self-government."

For hundreds of years, the corporate legal status of a municipality—often no bigger than a neighborhood—limited attempts by higher levels of government to infringe on local prerogatives. This situation did not change until the 19th century, when the city's legal status was reconceived to make it a creature of state government. Under "Dillon's rule," first formulated by the Iowa judge John Dillon in 1868, a state government could now abolish a municipality, redraw its boundaries, alter its taxing authority, and assign or withdraw public service responsibilities. In his 1980 article, Frug argued that shift should at least partially be reversed.

The business corporation's private status has given it a large and unfair advantage in meeting many Americans' needs for community, Frug wrote. To equalize the competition, he proposed that municipal corporations should have many of the same powers that business corporations enjoy. Municipalities should be free, for example, to operate their own local banks, credit unions, insurance companies, and retail food outlets, among other traditional private enterprise roles. More broadly, municipalities should have a new degree of governing autonomy; they should be free from outside governmental meddling in their affairs, as business corporations mostly are. In short (though Frug himself might not go along with this particular characterization), the municipality should have a newly "private" status in American society.

Surprisingly, Frug did not see the rise of the private neighborhood association as a promising step in his plan. Yet current neighborhood associations have much of the autonomy and freedom of action Frug advocated for his postmodern cities. To reconstitute the public municipality along Frug's lines would require a minor revolution in legal views; a number of Supreme Court decisions would have to be overturned, and laws would have to be rewritten by legislatures. It would be much simpler and easier to build on the existing legal status of private neighborhood associations. Most of them already are established legally as nonprofit private corporations. If neighborhood associations increasingly adopt the political role of public municipalities, it might be possible to achieve a revolution in the role of American local government without drastically changing the U.S. constitutional order.

Writing in the University of Pennsylvania Law Review in 1982, the legal scholar Robert Ellickson proposed just such a course. Ellickson observed that "the private homeowners association…is the obvious private alternative" to enhance the autonomy and defend vigorously the rights of small localities, much as Frug proposed. Ellickson also suggested jettisoning some of the legal distinctions between local governments and private neighborhood associations. He recommended overturning the 1968 Supreme Court ruling in Avery v. Midland County and related decisions "to eliminate the current federal constitutional requirement that local elections be conducted on a one-resident/one-vote basis." Then public municipalities, like existing neighborhood associations, would be able to adopt "some system that weighted votes by acreage or property value."

Relegating a large part of U.S. local government to a private status would reflect the fact that much of what local governments do is business-like. The federal government spends most of its funds on two functions: national defense and redistribution of income. Whatever the Constitution might say to the contrary, state governments in many respects evolved in the 20th century to become the federal government's administrative apparatus, controlled by significant federal funding and requirements. Local governments, however, engage in a much different set of activities—picking up the garbage, policing the streets, running the schools—that could be and often still are provided privately in other circumstances.

Dell Governments

The American computer manufacturer Dell bears little resemblance to traditional industrial giants such as AT&T, General Motors, and General Electric. Dell does not manufacture its own products. Most of the physical tasks associated with the production, distribution, and sale of Dell computers are outsourced, and the computers themselves are mostly made at plants outside the United States. Dell employees work largely to develop ideas and coordinate their implementation by others. The company works with advertising agencies to craft its image and arranges for the various stages of production and distribution of the end-line product. Many firms created in the last two decades operate in a similar "virtual" fashion.

Local government in a postmodern world might follow in Dell's path. The main tasks of government could be conceptual and coordinating—establishing the "values" and "meaning" of a particular "community." Issues of neighborhood scale would be left to private neighborhood associations, which in turn might outsource most services to private companies. Local governments would mediate between neighborhoods as needed; where they became involved in direct service provision, it would most likely involve arterial highways, water systems, sewer systems, and other services that require coordination across wide geographic areas and involve major economies of scale.

Neighborhood associations already have demonstrated that even basic governance tasks at this micro level can be undertaken privately. One adviser to neighborhood associations has said that an association is "both a community and a business to meet the expectations of the members" and appropriately functions privately in both these capacities. The result is a radical privatization of many local government functions, both in concept and in execution.

Mergers and Divestitures

The unit owner in a neighborhood association is not only a customer but an investor—indeed, his home often constitutes a significant portion of his total financial assets. In an ordinary business corporation, mergers, acquisitions, and divestitures are a routine part of life; stockholders who disapprove of the way a corporation is managed can exit the organization simply by selling their shares on Wall Street.

The territorial aspect of a neighborhood complicates such processes of entry and exit. In a private community, a split of one group from the association would require a large supermajority vote and perhaps unanimous consent. In the public sector, such a rift would amount to an act of secession. Most states have provisions for "detachment" from the municipal corporation, but few detachments have occurred over the years, due in part to the high transaction costs associated with getting the state government's approval.

In principle, the industrial organization of local government could be determined by a process of competition in the marketplace. Indeed, some students of urban affairs believe that a key to improved delivery of local public services rests in much greater flexibility among municipal boundaries. It should be easier, they argue, to assemble new governments covering larger areas and responsibilities from smaller units, or perhaps instead to divest smaller units from larger ones. One increasingly important area of law may be the appropriate provision of voting rules and other procedures for the approval of boundary changes and other structural adjustments to local government.

In the mid-1980s the political scientist Ronald Oakerson directed a study of the structures of local governance across the United States for the U.S. Advisory Commission on Intergovernmental Relations. Oakerson's report concluded that much wider opportunity for experimentation in local service delivery is needed. As Oakerson put it, "Of central importance is the authority to create, modify, and dissolve [local service] provision units. The structure of the provision side—including the variety of provision units—depends on who can exercise this authority and under what conditions." In this way, a Darwinian process of natural selection could shape what one might call the local government industry.

Oakerson also argued that we need more neighborhood-level institutions of government. "What is essential," he wrote, "is that small-scale communities have the capability to organize themselves to act collectively with respect to common problems. This requires that locally defined communities be able to self-govern, exercising the powers of government within a limited sphere—limited in terms of both territory and the scope of authority." Many goods and services, he noted, can best be "provided on a 'neighborhood' scale." At present, however, the governance structures of metropolitan areas "tend to preclude or inhibit the development of smaller, nested provision units—neighborhood governments—within [wider city] boundaries." As a result, neighborhood forms of governance are left out of the evolutionary competition to determine the future organization of local governments.

Oakerson said little about the radical political changes necessary to accommodate the formation of new local governments and to simplify the processes of boundary adjustment. Moreover, although he clearly recognized the importance of private associations, he did not necessarily see them as the preferred instrument of improved neighborhood governance. Yet one advantage of the neighborhood association is that its private status allows it greater ease of integration into the workings of a market economy—potentially allowing firms, for example, to buy and sell entry permission for new land uses within the neighborhood, or even to sell the whole neighborhood in one transaction. Properly written, an association's constitution can allow for the routine expansion, contraction, termination, or other modification of the association and its boundaries as economic circumstances change, with a flexibility that would be more difficult to achieve in the public sector.

It would be helpful, for example, if more neighborhood constitutions provided for private divestitures of association subunits—in essence, for private secessions—should a contiguous subgroup within a given association want to leave. Municipal corporations, by contrast, are bound by state laws governing urban secession. Furthermore, neighborhood constitutions should stipulate a well-defined process for acquisitions of new areas.

Opened up in this manner, the evolutionary workings of a market process can be expected to yield new units of local governance—and not just at the neighborhood level. A larger unit of local government might be able to deliver services such as water and sewer at less cost, and it might have greater access to various forms of specialized professional knowledge. But it would be at a significant disadvantage in other respects. It is difficult to create a system of positive incentives that will motivate a large-city bureaucracy. Larger cities contain a greater diversity of citizens and thus experience greater discrepancies between individual service demands and the common levels of services typically provided citywide.

A very small unit also may not be ideal. The time investments required for full democratic participation and other transaction costs of neighborhood governance may be too large for each homeowner. Economies of scale in service delivery may be impossible to achieve. A neighborhood should, therefore, be large enough to offer a self-contained physical environment of high quality and to limit the democratic costs of governance.

The best way to resolve such tradeoffs, Oakerson argued, would be through an evolutionary process driven by competition among governmental forms within an overall framework of metropolitan governance.

Tiebout World

In 1956 the economist Charles Tiebout famously suggested that competition among units of local government could result in the delivery of public services roughly as efficiently as a market solution. Local taxes would function as prices; each person would choose a local community in which the common level of public services corresponded to his or her service demands at the given local "tax price." If there were enough communities, and if it were possible to move from one to another at a sufficiently low cost, each person would be able to cluster with others of similar economic means and preferences. Indeed, in a hypothetical world of economic analysis in which there were no transaction costs at all—an assumption typical of economic modeling at the time Tiebout was writing—each person would in theory enter a community with an optimal level of public services and pay a property tax precisely equal to his or her share of the costs of these services. The system of local government would match demands and supplies for common services in a perfectly efficient way, like the market system for ordinary goods and services in economic theory.

The assumptions required to achieve a perfect Tiebout world are heroic, to say the least. It might be possible, however, to realize a very rough approximation, if there were a much wider flexibility in local governmental forms and boundaries than exists at present. Such flexibility could reduce significantly the transaction costs of metropolitan adjustments. Rather than physically moving to a new area at a high cost, a group of people already living in a neighborhood might be free to secede to form their own new unit of local government and thus obtain the collective services they want at this scale without exorbitant transaction costs.

If there were more room for such trial and error in the reorganization of local government, we would not need to prescribe an ideal size or arrangement for such governments. In the absence of such flexibility, a system of metropolitan governance is like a private industry in which the sizes and boundaries of business firms have been fixed by some outside decision maker. In such circumstances, it should not be surprising that metropolitan governance tends toward much less efficient forms. The standard processes of evolutionary change that drive market efficiency in business are absent in a metropolitan system comprising units of governance whose boundaries and other features were set in stone long ago.

There are other obstacles to the trial-and-error movement toward better local governance. Even where it is technically feasible and efficient, local governments are often prevented from selling their services to other towns or to the private sector. As Richard Briffault of Columbia Law School has written, in many cases municipalities "actually lack the authority to provide extra local services and require a special legislative grant of power before they are permitted to project their services across the local boundary line." Local governments in general are supposed to avoid direct entry into private markets, so as to avoid the appearance of offering unfair competition to ordinary private businesses.

Beyond Monopoly Governments

Bruno Frey, a Swiss economist, has noted that local government historically has held a territorial monopoly over collective service provision within its geographic boundaries. This outcome, he argues, is neither necessary nor desirable. Unitary governments may once have been suited to the collective tasks of the rural village. But modern communications and other developments have greatly reduced the transaction costs associated with divesting functions from unitary local government to a diverse range of service providers.

Frey thus suggests that many current tasks carried out by local government should instead be performed by what he calls "functional overlapping competing jurisdictions." An FOCJ, unlike a traditional local government, would be more specialized by function and could overlap with the territory of another FOCJ; two FOCJs could find themselves in competition with one another. Consumers would choose among competing jurisdictions in much the same way they now choose between Wal-Mart and Home Depot. But an FOCJ would differ from an ordinary business because it would employ a collective form of purchasing activity; the purchasers would own the business and FOCJ management would be overseen by a democratic process of purchaser/owner decision making. Frey argues that FOCJs, resembling private clubs but extending beyond golf and tennis to include a wide range of local collective services, would be genuinely "governmental," partly because they would have "enforcement power" and could "levy taxes."

Frey sees a worldwide proliferation today in the forms of governance. At the global level, the International Olympic Committee might be regarded as a form of "government" that is limited to one particular function—conducting the Olympics every four years. Washington Area Girls Soccer, a private, nonprofit organization, oversees advanced soccer competitions for girls 10 to 18 years of age, crossing many jurisdictional boundaries throughout the Washington, D.C., region. Elsewhere, a similar local soccer league might be organized and coordinated by a large city's public recreation department. In another domain, education, the school choice movement has adopted an FOCJ stance: the establishment of overlapping jurisdictions for public service providers. Charter schools and private vouchers go farther still, in the first case allowing schools to operate with considerable independence from traditional education rules and regulations, in the second providing for the direct private operation of schools with at least partial public funding.

The evolution of the long-distance telephone industry during the last 20 years shows another transition from a single geographic monopoly to a system of competing and overlapping telephone companies. (Although AT&T, which held the monopoly, was private, it operated under tight government oversight.) The case of the telephone industry illustrates how technological innovation can alter the desirable organizational forms of public service delivery. Yet the first new competitor in long-distance telephone service, MCI, had to struggle long and hard in the courts before it was permitted even to compete with AT&T. Local telephone monopolies survived into the 1990s. Today, the emergence of cell phones and voice-over-Internet technology has further encouraged the proliferation of competitive telephone services.

Already partially realized, Frey's vision of functionally oriented forms of "local government" that overlap and compete with one another could expand into the territories of other public monopolies. Moreover, although Frey puts FOCJs in the category of "public" government, there is little about them that prevents their functioning as entirely private entities. The rise of the private neighborhood association has shown that even many tasks previously considered exclusively public and governmental can in fact be carried out privately.

The German economist Jurgen Eichberger offered two criticisms of Frey's vision. First, he argued that some aspects of government involve defining the rules of the game and may therefore require an exclusive territorial jurisdiction. Second, he questioned each FOCJ's need for "direct election of management by members." Frey proposed that FOCJ "constitutions" should "encourage members.…to participate actively in the management of FOCJ affairs." But Eichberger suggested that we need not automatically presume "the general superiority of [a] participatory membership rule," arguing that "the appropriate form of FOCJs will vary with their functions."

Another German economist, Wolfgang Kerber, agreed with Eichberger that an "underlying legal order" would still be needed to provide, among other things, "a set of metarules that ensure that a system of FOCJs is really able to enhance the welfare of the citizens." But Kerber argued that a competitive process could enter the legal order as well; it may be possible, he wrote, for "individuals or firms [to] have the right to choose between legal rules or whole legal orders. This will lead to competition among legal rules or legal orders, a phenomenon that can already be observed. If firms do business on an international level, they have the right to choose which kind of contract law they want to use, e.g., German, British, or U.S. law." With "the FOCJ concept," Kerber concluded, Frey revealed that "we do not have 'the' government but a multitude of governments."

A Postmodern World

Put together these trends and speculations—the rise of private communities and Dell governments, the push for more-flexible municipal boundaries, the possibility of FOCJ-style governance—and what picture of the postmodern political order emerges? We'd have a world where the size and functions of local government would be determined by a trial-and-error process of competition. Different institutional forms would contend with one another; rather than following a central administrative plan, the nature and tasks of local government would be determined by a private market. The "governments" themselves would be more private than public, facilitating a routine flow of mergers, breakups, divestitures, and other organizational rearrangements.

Speculating more boldly, we might see the total privatization of American local government. Postmodern local government would fall under a brand-new legal category: the exercise of a collective private property right in the manner of a private club. We would return, in effect if not exact form, to an older model, under which local "governments" were private institutions operating for many centuries under the same basic legal status as private business corporations. Radical though it sounds, such a revolution is already quietly emerging in thousands of condos, co-ops, and homeowners associations across the United States.