A Free Market Defense of the City

July 14, 2012 § Leave a comment

The consensus opinion seems to be that suburbanization in the United States is a direct result of the free market. Indeed, the rallying cry of many progressives revolves around the idea that these bland, homogenized communities are a consequence of the unregulated market. What’s more, even self described free marketeers have fallen victim to this fallacy, suggesting that the outward growth of “sprawl” is nothing more than a reflection of a shift in preference from the cramped urban core, to the wide open expanses of suburbia. What both these groups ignore is the fact that individual preferences do not occur in a vacuum. This “shift” in preference did not occur spontaneously. In fact, since the early twentieth century, various government programs have managed to shift the lifestyle choices of the American consumer in a drastic fashion. There is perhaps no industry in the United States which has experienced the strangulating effects of the government central planning more so than the housing industry. The rate of suburban growth in the US during the twentieth century would have never have been possible without the controlled direction and funding of the federal, state, and local governments. Furthermore, the bland, monotonous, and soulless style of suburban development would have never survived to such an extent without the standardization imposed by the federal government.
The history of sprawl in the United States provides a strong case against central planning. Such a massive growth in housing would have never been accomplished without the illegitimate force of the federal government. This “growth” should not be commended. On the contrary, it should be condemned for what it is: an unsustainable and inefficient byproduct of government intervention.
There are two means by which government has created this suburban mess: the Initiation and perpetuation of sprawl. Government programs had effectively “initiated” the suburban craze, and further government intervention has only perpetuated the outward growth.

What is sprawl?

Vague terms like “sprawl” can have a myriad of connotations. Sprawl has occurred in many forms throughout history. For instance, some of the earliest suburbs formed in the ancient city-states of Ur and Babylonia, and later in the Roman Empire. In most cases, suburbia was a result of either the poor being squeezed out of the urban core by the social elite, or the rich building massive villas on the outskirts of civilization. In nineteenth century England, uniform row houses were the residential development of choice for the working and middle class populations. Similar forms of housing were what formed the original “streetcar suburbs” of the eastern United States. Although deplored by contemporary critics as cramped and cheap, such structures would eventually become the very hallmark of desirable urban architecture.
None of these historical examples of sprawl have exhibited the painfully dull patterns of development that the United States has experienced over the past century. When most Americans hear the word “sprawl”, it conjures a much different mental image. In the United States, suburbia has become synonymous with strip malls, subdivisions, and soccer moms. In other words, cheap construction materials and government standardized designs have become the name of the game. To even suggest that one day, these miles of cul-de-sacs lined with McMansions will somehow become regarded as historic neighborhoods is laughable.


As usual, there is a kernel of truth to the mainstream explanation for suburban sprawl in the United States. The culprit, we are told, is the preference shift among individuals living in American metropolitan areas combined with an increase in mobility provided by the free market (i.e. automobiles). This is true as far as it goes. Indeed, there has been a shift in the preferences of individuals since the first waves of European ancestors started populating the city streets of the major industrial cities. Rather than settling in small, tight knit, ethnic neighborhoods, most Americans prefer the privacy of a large home on the outskirts of town. And why not? Would it not be incredibly un-libertarian to reject the actions of individuals in the market place? Likewise, the invention of the automobile was one of the greatest feats of free market capitalism. The increased living conditions provided by the automobile are immeasurable, and there is no doubt that its invention would have created some type of sprawl even in the absence of government encouragement.
Of course, this argument misses a major point. Yes, American’s preferences have shifted over the years, but not all shifts in preference come about spontaneously. In fact, the evidence overwhelmingly supports the notion that government intervention in the 20th century lead to the current American ideal of “suburbia”. If we are to believe that suburbanization is a desirable outcome, then it must follow that government intrusion is necessary in the housing market. Without it, the “American Dream” as we know it is impossible. (Or we could do the sensible thing and reject the “American Dream”)
Then what about the automobile? It’s already been admitted that its mass production would have likely created some sort of urban sprawl without the aid of the state. But how much sprawl would have resulted from this free market creation? The answer is obviously impossible to judge in a concrete, quantitative manner, but the evidence strongly suggests that most of the suburban growth in the 20th century was due to government intervention. Furthermore, it’s impossible to judge the effects of increased car ownership on sprawl without discussing the creation of the federal highway system. Without a doubt, the Federal Aid Highway Act of 1965 was essential in moving more people further away from the inner core and closer to the farmlands. Without the easy access provided by the interstate highway system, these uncultured, uncouth, and unsustainable monuments to government regulation which we call “suburbs” would never exist.
The role played by the Federal Highway system in creating modern suburbia cannot be ignored, but it pales in comparison to the more influential pieces of government legislation enacted twenty years beforehand.
The New Deal is still heralded to this day as a defining moment in American history. What is generally agreed upon in mainstream American politics as an example successful use of government force to correct for “market failure”, The New Deal is embraced by seemingly everyone in mainstream American politics.  Nowhere is this dogma stronger than in the historical interpretation of the New Deal’s effects on the housing industry. A number government sponsored enterprises were created under the New Deal to handle the ailing housing market. These programs were snippets from the fascist notebook, and amounted to nothing more than the collusion between big government and big business. Sold to the public as a means to “stop free fall, not expand the housing market” [pg 49], these programs managed to do both. And their long term effects are still being felt today.

The most influential of these government agencies was the FHA, created in 1934 as a part of the National Housing Act.  According to its first annual report, the FHA’s purpose was “to bring the home financing system of the country out of a chaotic situation.” The FHA would essentially insure the mortgage for any home that fit its standards, which were listed in its detailed rule book. The result was that the FHA effectively subsidized the housing market. By “virtually eliminating the risks for lenders”, this government insurance helped “revive” the American housing market, explains Marc Weiss. [link] The situation couldn’t have worked out better for developers, as Doug French describes:

“And while builders feared planning from local city halls, they embraced intervention from Washington. After all, city hall couldn’t guarantee mortgages which expanded demand for their product, plus their friends in the industry were running FHA.”[link]

Of course, the subsidization of the housing market meant that the major growth in housing only occurred in those homes that fit the guidelines laid down by the FHA. Those rules were listed in the FHA’s underwriting manual, which essentially restricted this new, government insured growth to the narrow sliver of society that could be described as white, married, and complicit. In other words, the FHA laid the groundwork for the “American dream” and through the use of its Underwriting manual, standardized and homogenized the American suburbs. The FHA Underwriting Manual discriminated against blacks, and put serious emphasis on only insuring homes in neighborhoods with racial and socioeconomic homogeneity. The sad irony that many of today’s “liberals” and progressives view the FHA as an example of government “done right” should not surprise anyone. One of the most essential flaws of government intervention that so called progressives neglect to realize is that instituting policies into law can inadvertently standardize a contemporary view that could be viewed as repulsive decades later. The racism in the FHA guidelines provides a good example of this.
The FHA guidelines managed to put numerous small developers out of business. Over time, the large, corporate home builders took complete control of the market, because they were the only ones with the staffs to complete the FHA paperwork on a large scale and managed to thrive during the Great Depression.  [link]
Part of the reason the FHA was so successful, was due to the confidence that the private sector had in its abilities. Weiss says it best:

“Property owners and real estate entrepreneurs viewed FHA rules and regulations as similar to deed restrictions—private contracts which were freely entered into by willing parties—rather than as similar to zoning laws, which were sometimes seen as infringing on constitutional liberties.”

The rules and regulations of the FHA were followed without must objection. As was mentioned earlier, the fact that Uncle Sam was insuring a majority of the loan and knowing that most of the men who wrote the regulations were from the housing industry probably made the process much smoother. So smooth, that even mortgages not insured by the FHA began to follow the FHA’s building guidelines.

This collusion between the government and private sector would sow the seeds for suburbanization in America. But it wasn’t until another New Deal program was instituted that the American sprawl-mania took form.

In 1938 FDR created the FNMA, or Fannie Mae. Fannie Mae was meant to create an artificial secondary mortgage market. The hope was to make home ownership more prevalent across the entire United States. Sadly, Fannie past all expectations. It was a complete success. One that American cities are still paying for today.
As a secondary market for mortgages, Fannie Mae created a way by which FHA insured mortgages could be bought and sold across the country. Large institutions like commercial banks and insurance companies would buy and sell FHA mortgages via Fannie Mae. This made home construction in areas outside the northeast possible. It also contributed significantly to the growth of suburbs.
Fannie Mae increased the dependence on large, national firms. From 1920 to 1953, large institutional ownership of residential mortgage debt rose from 50% to 80%. [pg 70]. The FHA itself claimed that “86 per cent of the net increase in the mortgage market from 1939 to 1954” was comprised of large, institutional investors. Commercial banks also saw a large amount of growth in market share within the housing industry. Since the creation of the FNMA, institutional and commercial banks have been major players in the housing market. Louis Hyman explains, “Debtors gradually became accustomed to owing money in large amounts to someone they had never met”.[page 72]
Put simply, the combination of the FHA and Fannie Mae laid the groundwork for a housing market which encouraged the abandonment of the urban core. Only newer houses that fit the standards of the FHA could be federally insured and resold to the government via Fannie Mae.

Louis Hyman said it best:
“The FHA had redefined what middle class, predominately white Americans believed was possible for owning their own home—and this “ownership” was predicated on twenty years of indebtedness. Government policy had created mortgage markets and in doing so remade the American mortgage”[page 72]


Although the federal government laid the ground work for the suburban nightmare that sits just outside every American city, the problem has only been perpetuated by multiple federal, state, and local government policies which have encouraged the population shift which has occurred over the last century.


During the 1970’s and 80’s, many local school districts used a federal court decision as an excuse to implement desegregation busing, or busing. Busing was a hot topic at the time, and inspired numerous movements that rejected the constitutionality of such policies. In general, busing was meant to integrate different races into a single school, ending de facto segregation. To the contrary, it actually inspired many families to move to outside the school district entirely. Thus, many of the cities have lost significant population, and thus their tax base was decreased. As a result, funding for such schools is much worse than those in neighboring, suburban towns. Of course, it was much easier for the white families to move out of the city and to the homogenized suburbs. This was due in large part to the racist rules and regulations imposed by the federal government decades before hand when the suburbs first began to grow.


Zoning laws are often cited by those on the left as a tool that the government can use to “fight back” against the suburban growth patterns caused by the “free market” (by this point, you should be laughing to yourself at such a statement, but I can assure that this mindset is comically common). In fact, it’s zoning laws that led to much of the ridiculous suburban growth patterns we see outside the urban core—and depressingly, sometimes even within the urban core. As always, progressives rely on the utopian mantra that if only we had the correct zoning laws, THEN things would be great! Sadly, this has never worked, and many major American cities have “dated” zoning laws that require very suburban-esque construction.

To progressives, the use of centralized government force is only seen as positive when it agrees with their views. Zoning is no different. Rather than pointing out that the zoning in the suburbs which encourages strip malls and large parking lots is an inherent symptom of zoning, progressives see it as a problem that can somehow be “fixed”. There is a strong belief among urban progressives that a world without zoning laws would result in some sort of free market free-for-all which would result in massive parking lots and PF Changs on every corner. They never take a second to consider that those big box stores and strip malls are a direct result of the lending market implemented by the federal government decades ago. In other words, they are using zoning as a weapon against…well, another form of “zoning”.

Urban Renewal

One of the most damning indictments of centrally planned urban design is Jane Jacobs The Death and Life of Great American Cities. First published in 1961, Jacobs laid a sledgehammer to the so called “urban renewal” phase that ruined numerous historical neighborhoods in American cities across the country, but especially in New York City.
The “Urban Renewal” movement in the United States pushed for an agenda that demolished historic apartment buildings and replaced them with large, concrete monstrosities. These monstrosities were separated by class, so that each building housed a specific socioeconomic ladder of society. More often than not, they were government buildings.
The main argument in favor of Urban renewal was that isolating income groups and providing more green space somehow made things safer. Jacobs dissects this argument, citing multiple reasons why close knit urban construction is actually safer than spread out suburban construction. In fact, most of the stigmas that regard cities as “unsafe” are a result of the socioeconomic inequalities that have been institutionalized by the federal government and accepted by the private housing industry.

The Drug War

To be more specific, all other things being equal, an urban neighborhood is a much safer place to raise a child. It has obviously been established that our current scenario isn’t remotely “equal”(a term which I use with caution. I mean it in the Hayekian sense).

There is no denying that the Drug war unfairly affects the poor inner city class more than any other group. The war on drugs has turned the city streets into a blood bath, and created another reason for human beings to escape the city for the confines of the suburbs.

By outlawing drugs, especially marijuana, the federal government allows for growth in the black market. The black market almost always involves gangs, violence, and deplorable situations. The conditions of most American cities are in large part due to this irrational drug policy.


Obviously, the individual preference of anyone should not take preference over others. In other words, what one person decides to do with their money is their own business. Personally, I prefer an urban setting. Does that mean that I believe all suburbanites are the bane of civilization and should be punished for their lifestyle? Of course not. To the contrary, I support every voluntary, non coercive decision made in the free market. I don’t blame families for moving to the suburbs. The current state of major American cities makes it hard for many to raise families there. Even as someone who appreciates what the city offers, I understand that I may reach an age when such a lifestyle isn’t possible—or just isn’t safe.

But such a scenario raises questions. What brought us here? What policies lead to such a situation? I decided to type this blog to show that there is  a free market answer to the perils of the inner city. There is a way out of this mess.
Too often progressives get away with taking the moral high ground. And too often most conservatives and libertarians give it to them. This is another situation where such an concession is inexcusable. Much like the government student loan debate, those who favor increased government intervention are merely layering band aids over a wound that keeps on bleeding through. When it comes down to it, that all that the state can do. It merely creates a problem, and then attempts to use the same methods to fix it. There is a mountain of evidence that suggests that the sad state of the American urban core is due entirely to government intervention. My research scrapes the surface. My work is the culmination of a few hours with a keyboard and an internet connection. There is much more information out there.

Finally, and most importantly, society must borrow a page from Jane Jacobs book (quite literally) and understand the type of problem that a city is. Even if we reject all of the evidence thus far, and assume that government had nothing to do with abundant growth of suburbia in the United States, there is only one way to analyze the inner workings of the city itself. Jacobs describes the problem of the city as one of “organized complexity” as opposed to “disorganized complexity”. First and foremost, one must understand that human interaction is the product of complex, non-random events which cannot be simplified using statistical analysis and breakdown via income groups. I apologize for being so brief on this point. This has been an area of interest to me for quite some time. I will post more on the topic another time.

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