...and Chris Webster responds to Sarah
Further upgrading the intellectual quality of this blog, Chris Webster (see below) responds to Sarah's comments...

From Chris:

Continuing the discussion...a few thoughts in response to Sarah's comments.


Sarah, your first and second contrasted pictures do not seem mutually exclusive
to me. It may be that municpal government has over-reached itself and this is
why private governance has stepped into the breach. This is not inconsistent
with the private version being riddled with inefficiecies and inequities. The
state steps in to mitigate against private neighbourhood market failures. And so
the iterative process proceeds. If the institutions of demoncracy and
accountability are open, transparent etc, one might assume, (with Karl Popper)
that the social experiment ends up with a net gain to society (forgetting about
the spill-over issue for the moment and just concentrating on the welfare of
those within private communities - the same argument can be developed in respect
of social spill-overs but will have a different conclusion).


Talking about market failure, Oliver Williamson's idea of remediability as an
efficiency criteria is an interesting one (eg Williamson 1999 Public and Private
Bureacracies JLEO Vol 15). Neo classical economists got it wrong by defining
efficiency in terms of utopia (Demsetz 1969 - 'Nirvana economics' JLE Vol 12) -
markets failing when compared to the 'perfect market'. The big mistake there was
to ignore the costs of the government interventions which such analysis
prescribed (the zero transction cost assumption of orthodox economics).
Actually, as Ronald Coase (1964 'The Regulated Industries' AER Vol 12) points
out, 'until we realize that we are choosing between social arrangements which
are all more or less failures, we are not likely to make much headway'.
Williamson's transaction cost approach, while having its flaws, seems a useful
one for exploring the issues of private government. Its emphasis is on
evaluating the match between, on the one hand, the attributes of a particular
set of transactions (for example the transactions between neighbour and
neighbour; home-owner and the agency owning the local public good assets etc)
and on the other, alternative governance frameworks. The sunk costs of the
extant set of institutions (eg. traditional municipal government) should
feature in the evaluation - hence the idea of remediability - do the costs of
creating new institutions outweigh the benefits of change? The costs of the
American urban system turning to private government include the post-contract
adjustment costs of litigation (which are, of course, unkown at the time of
individual home-owner investment but which become more predictable over time).
As these costs become more predictable they can be factored into contracts,
private governance rules and state institutions via special provisions (as Sarah
notes exist in the UK system to protect lesees from forfeiture, for example, or
they can be factored into price (higher price to reflect risk). Either way,
society learns over time how to organise itself to progressively reduce the
costs of competition and conflict over scarce resources.