Neoclassical economics – and contemporary extensions of it – has an outsized presence in academic and policy making circuits. This position of privilege builds upon more than a century of theoretical development, comprising the contemporary “mainstream” of economic science. The characteristics and rise of this mainstream, determined in many cases by means beyond pure intellectual merit, has been regularly documented in the existing scholarship.

Economic imperialism has been one of the results of mainstream dominance, and its academic impact on other social sciences has been widely documented, including their corresponding areas of policy making. In this regard, I present here an approach to the problematic relationship between Neoclassical Urban Economics and Urban Planning. These are two related social science disciplines, which however have very different epistemologies and approaches to policy advice.

The main difference between academic mainstream Economics and Urban Planning is methodological, in terms of what is considered a valid approach to scientific knowledge. Economics builds upon logical positivism; it first performs deductive theory construction that “describes” reality, and then subsequently tests its theoretical predictions, which in some cases (not all the cases) lead to policy prescriptions. In contrast, Urban Planning is an action-oriented and problem-solving scientific discipline. It inductively produces normative theory, which explicitly shows the analyst’s point of view regarding the topic and how to intervene on it (public policy advice).

Mainstream Economics is in essence defined by the method and theoretical approach, not by the topic (the economy). This allows it to engage with a wide variety of topics, one of them being the spatial analysis of the built environment, which is also the topic of academic Urban Planning.

“Neoclassical urban planning”

When mainstream economics meets urban planning, we get a peculiar approach to understanding the built environment, which I call “Neoclassical Urban Planning”. The first stage of this approach entails the development of abstract theoretical models of cities’ spatial structure. These models use clearly defined property rights and rational behavior assumptions to deductively determine the “optimal” spatial distribution of economic activities, real estate values and structural densities. In the second stage, real-world problems like transport congestion or housing unaffordability, are treated as “deviations” from this spatial optimum. Economists can offer policy advice, only after comparing real-world cases to the optimum as an ideal benchmark. That contrasts with planners’ approach, describing the spatial structure of actual cities and their corresponding problems, with their normative benchmark based on perceived reality.

The empirical research agenda in mainstream urban economics systematically tests and builds upon its abstract theoretical models, and it is generally believed to be exempt from normative value judgements. However, the methodology employed by economists does build upon a crucial value judgment: competitive markets are the comparison benchmark with the highest economic well-being. This is the case, even in fields of neoclassical research that engage with market failures, like industrial organization, endogenous growth theory, and economic geography.

In the case of Urban Economics, the normative benchmark for economists is spatial general equilibrium in perfect competition with perfect information, determined by agents’ willingness to pay for different locations with given revenue and transportation costs. This is the benchmark against which to compare real-world spatial outcomes, and towards which these economists’ policy advice wants to nudge the urban economy.

From Neoclassical Urban Planning to Neoliberal Urbanism

Urban Planning scholars have identified that Neoclassical Urban Economics is normative in the above-described sense. However, these scholars do not exactly define it in the terms I do here: pushing the urban economy towards its competitive spatial general equilibrium using public policy tools, for example: demand-side housing subsidies, property tax abatements, interest rate subsidies, or the de-regulation of construction, environmental and urbanistic requirements. Urban Planning scholars tend to summarize this type of public policies as Neoliberal Urbanism, which in the case of developing countries has become predominant since around the 1990s. Before that, and with the support of multilateral organizations and donors, urban planners in developing countries tried to exercise planning in the proper sense of the term: elaborating and reflecting about strategic and large-scale metropolitan plans, which were attempts at pre-determining the spatial structures, quality of the built environment, and construction styles, in advance to the operation (or lack thereof) of the real estate markets.

During the neoliberal era, the role of planners has been changed into facilitators of market-led urban development. The corresponding scholarship has accommodated this new development narrative by replacing its metropolitan grand-scale and strategy approach, with the impact assessment of public policy actions. The original attempts at large-scale socio-spatial transformation using planning tools have been diminished. After all, and following what described above, planning is government intervention that might shift the urban economy away from its market-determined optimum.

After 30 years of neoliberal urbanism… where are we now?

After more than 30 years of neoliberal urbanism it is unclear if developing countries’ cities have had a better socio-economic performance, or if their spatial structures and interactions are more efficient. In the jargon of Neoclassical Urban Economics, it is unclear if they have moved closer to their normative benchmark: the optimal spatial general equilibrium. Perhaps the reason is that this benchmark is an abstract theoretical construction in the first place, which in addition might be unachievable according to the second-best theorem, a feature conveniently forgotten by some neoclassical economists.

Another possibility is that market forces are in fact pushing individuals closer towards their individual optimum. Let us be reminded that developing countries’ cities have extensive informal markets of labor, transportation, and real estate, which by definition are non-regulated or taxed. Therefore, in the neoclassical logic, these would be free markets converging towards general equilibrium, with individuals efficiently responding to market incentives. Such is the romantic view of some neoclassical analysts, who forget that these urban inhabitants are “optimizing” while exposed to extreme information asymmetries, non-convexity (low liquidity) of real estate assets, and externalities (pollution, congestion, criminality). Accumulated empirical research does not signal that urban efficiency has improved anywhere during the last 30 years.

In contrast to the approach of neoclassical urbanism, urban planners explicitly state their normative view and policy objectives (ideological in the jargon of mainstream economics). For example, planners state the need for government-provided or government-funded housing, to alleviate its scarcity; also, they propose inclusionary zoning, in fighting spatial segregation. Such plans and objectives do not require any abstract comparative benchmark, but explicit real-world comparisons and metrics, even if they seem biased or simplistic in the eyes of neoclassical economics.

Some references regarding the topics discussed:

On the normative background of market failure

• Benetti, C. (1997), El método normativo de la teoría económica positiva. Cuadernos de Economía, 26, 7-19.
• Keppler, J. (1998), The genesis of ‘positive economics’ and the rejection of monopolistic competition theory: a methodological debate. Cambridge Journal of Economics, 22(3), 261–276

On the imposition of the neoclassical program

• Lee, F. (2004), To be a heterodox economist: the contested landscape of American economics, 1960s and 1970s. Journal of Economic Issues, 38(3), 747-763
• Goodwin, C. (1998), The patrons of economics in a time of transformation. History of Political Economy, 30(supplement), 53–81.

On economics imperialism in urban planning and the inefficiency of neoliberal urbanism

• Gunder, M. (2016). Planning’s “failure” to ensure efficient market delivery: A Lacanian deconstruction of this neoliberal scapegoating fantasy. European Planning Studies, 24(1), 21–38.
• Calderon, J. (2004), The formalisation of property in Peru 2001–2002: the case of Lima. Habitat International, 28(2), 289-300
• Jones, G., & Ward, P. (1995). The blind men and the elephant: A critic’s reply. Habitat International, 19(1), 61–72.

On the neoclassical view regarding urban poverty (slum development) in the global south

• De Soto, H. (2003), The Mystery of Capital. Basic Books.
• Quigley, J. (2012), Urbanization, Agglomeration, and Economic Development. Commission on Economic Growth and Development, Working Paper 19. The World Bank.

On urban regulation as “regulation failure” in economics scholarship

• Glaeser, E. (2009), The causes and consequences of land use regulation: Evidence from Greater Boston. Journal of Urban Economics, 65(3), 265-278.
• Anas, A. & H. Ree (2006), Curbing excess sprawl with congestion tolls and urban boundaries. Regional Science & Urban Economics, 36(4), 510-541.

Nestor Garza is Assistant Professor at the College of Business Administration and Public Policy – California State University Dominguez Hills. ngarza@csudh.edu

This post is an abbreviated and modified version of a journal article published by the author: Garza, N. & J. Garza (2023), Urban strategy in an era of public policy assessment: beyond the methodological divide. Review of Development Economics.

Photo: Shanghai Urban Planning Exhibition Center. By Jordiferrer.