〜Will modern cities enjoy true prosperity through the "spontaneous order of the market" or "planned government intervention"?〜
*This article is based on research and analysis as of December 15, 2025.
"By pursuing one's own interests, one often promotes the interests of society as a whole more effectively than one might intend."
The concept of the "invisible hand of God" proposed by Adam Smith, the founder of economics, in his book "The Wealth of Nations" in 1776, has sharply questioned the very nature of the "cities" in which we live, even today, 250 years later.
Take a look around at the cityscapes we walk through every day. Is what we see there the product of meticulous, rational government planning? Or is it the result of the market, where countless individual desires and economic activities intersect and accumulate by chance? The balance between the spontaneous order of the market and planned government intervention in urban development is not just a matter of aesthetics. It is a crucial issue that concerns the very foundations of the economy, such as the appropriate level of housing prices, the competitiveness of office rents, and ultimately whether a region can continue to generate wealth into the future.
This paper provides a detailed comparative analysis of the cases of Houston in the US, which approaches complete laissez-faire, London and New York, which protect their brands through strict regulations, and Tokyo, which has evolved a unique hybrid model of public-private partnerships. Furthermore, it explores the new trend of "smart cities" led by technology companies and the "reality of a shrinking society" faced by regional cities such as Toyako Town in Hokkaido, to unravel the ideal integration of "market" and "planning" in next-generation cities.
1. Theoretical background: What is "order" in cities?
Spontaneous Order vs. Designed Order
The history of urban theory is also a history of debate over the "source of order." 20th-century urban thinker Jane Jacobs and economist Friedrich Hayek viewed cities as "complex systems that, to a certain extent, organize themselves spontaneously (Spontaneous Order)." They argued that even if a centralized planner attempts to design a city in a top-down manner, it is impossible to fully understand the subtle interactions between countless people, and that excessive intervention will diminish the city's vitality.
However, market mechanisms are not omnipotent. What economics calls "external diseconomies" -- for example, factory smoke, blocked sunlight due to construction, and damage to the landscape -- can lead to market failure if left unchecked. Therefore, modern urban planning exists on a spectrum of how much trust to place in this "invisible hand" and how much to correct with the "visible hand (regulation)."
2. The Houston Experiment: The Dynamism of Unregulated "Free Markets"
So what would happen in a city where regulations were actually eliminated to the extreme? The fourth largest city in the United States, Houston, Texas, could be considered a grand testing ground for this.
Absence of zoning creates overwhelming supply flexibility
Houston is known as the only major city in the developed world that does not have Euclidean zoning, which dictates land use. There are no administrative divisions here, such as "this is residential" or "this is commercial."
The result? Supply responds to market demand with astonishing speed. For example, if demand for housing surges in an area, developers can convert old warehouses into townhouses without having to wait for lengthy government rezoning procedures.
In fact, between 2007 and 2020, approximately 34,000 townhouses were built in Houston following the relaxation of lot size restrictions, and more than 80% of these were built not on existing residential land but by converting commercial and industrial land. This is a clear example of the "invisible hand" autonomously reallocating land to the most profitable (i.e., desired) uses.
The justice of "cheapness" and its price
This flexibility is clearly evident in economic data: the chart below compares construction costs and housing price levels in major cities.
Comparison of construction costs in major cities (2024-2025)
*Estimated based on various construction market survey data
Construction costs in Houston are less than half of those in New York, and housing prices are more than 50% lower than the average for densely populated areas in the U.S. By removing the "barriers" of regulations, the city has achieved "affordability" that allows even the middle class to obtain a rich living environment.
Of course, this comes at a cost. The sprawl phenomenon (disorderly suburban expansion) that is premised on a car-oriented society is serious, and issues such as the underdevelopment of public transportation and the lack of convenience within walking distance have been criticized from the perspective of the environmental impact.
3. The woes of New York and London: The high cost structure of the "visible hand"
In contrast, New York and London are prime examples of cities with extremely strict urban planning regulations: historic landscape protection, strict zoning, and complex permitting processes. These are shields that protect "beautiful cities," but at the same time, they also function as huge barriers that hinder economic activity.
The invisible tax of "time"
Particularly serious is the time cost involved in obtaining construction permits. Analysis of data from the World Bank and other sources shows that in cities with strict regulations, it is not uncommon for environmental assessments, consultations with residents, and negotiations with historic building preservation committees to take years to complete.
In real estate development, "time is money" is not a metaphor but a reality. Delays in development lead to increased capital costs, which are ultimately passed on to rent and office rents. Behind the fact that office rents in London are about 1.4 times higher than in Tokyo and housing prices continue to soar without limit, there is not only excess demand but also a "supply bottleneck" caused by regulations.
| Comparison items | Houston (Market Driven) | London/NY (Planning led) |
|---|---|---|
| Basic principles of regulation | Laissez-faire Complemented by Deed Restrictions |
Management/Preservation Strict zoning and landscape protection |
| Supply Mechanism | Short lag between demand and supply Easy to change use |
Licensing delays of several years Rigid supply |
| Economic consequences | Low housing prices and low barriers to entry | Property values soar, gentrification accelerates |
| Urban challenges | Sprawl, car dependency, and landscape sprawl | High cost of living, outflow of young people and working class |
4. Tokyo Model: The success and uniqueness of the "guided hand"
While Western examples tend to be discussed in terms of a binary "freedom or regulation," Tokyo has taken a very unique "third way": a strategy of "guidance" in which the government controls the market while skillfully harnessing its energy.
Mechanisms for urban regeneration through public-private partnerships
The Urban Renaissance Special Measures Act, enacted in 2002, completely transformed Tokyo's skyline. The key to this law is the barter system, whereby private developers are given a significant bonus on floor area ratios (FAR) in exchange for making "public contributions (such as the development of plazas and the construction of subway access corridors)."
In other words, instead of unilaterally imposing regulations, the government offered incentives, saying, "If you want to build higher, do it for the public good." This led to a chain reaction of large-scale development projects funded by private capital in Marunouchi and Toranomon. This can be said to be a successful example of guiding the "invisible hand (private profit-seeking)" to the "visible hand (policy objectives)."
A "spontaneous compact city" created by a railway company
Furthermore, the business model of private railway companies has determined the urban structure of Tokyo. Railway operators such as JR and Tokyu are both landowners and developers.
They have a strong incentive to concentrate commercial and office functions around stations in order to maximize both fare revenue and real estate value.
In places like London, stations and surrounding development are often separated, but in Tokyo, railway companies have taken the lead and have resulted in the realization of Transit-Oriented Development (TOD). This can be seen as a victory of the "invisible hand," in that it has resulted in the formation of a highly efficient city with a low environmental impact, not as a result of government orders but as a result of rational economic activity by companies.
5. New urban models and their implications for rural areas
A quarter of the 21st century has passed, and a new player has emerged in urban planning: the big tech companies.
Woven City, which Toyota Motor Corporation is developing in Susono City, Shizuoka Prefecture, is driven by a "third principle" that differs from Adam Smith's market principles and government public planning: optimization through data and algorithms.
Because this is private property and not a public road, fully autonomous vehicles can operate without being restricted by road traffic laws. Resident data is collected in real time, and the City OS adjusts supply and demand. This is an adjustment based on calculation, not market price. While this promises ultimate efficiency, it also presents entirely new challenges that traditional cities face, such as privacy and democratic consensus building.
Now, let's turn our attention to regional cities. In tourist destinations like Toyako Town in Hokkaido, there is a struggle between the intense market pressure of inbound demand and the regulatory barriers that must be put in place to protect the city's beautiful natural environment.
If left to the market, uncontrolled development will proceed, destroying the landscape, which is a tourist resource, in the long run (external diseconomies). However, if we rely solely on regulations, abandoned and vacant houses will be left unattended, and the town will slowly die (sponge-like). What is needed here is a wise policy that uses the invisible hand to "nudge" people in the desired direction, by designing incentives such as "preferential treatment for those who live in the city center," as Toyama City has done.
Conclusion: A wise guardrail that integrates the three "hands"
Research into the correlation between urban structure and economic performance has revealed that neither "total freedom" nor "total control" can be the optimal solution in modern cities.
As Houston has proven, market flexibility can dramatically reduce costs and generate vitality. However, as London has shown, strong regulations are essential to protect "cultural capital" such as history and landscape. Furthermore, Tokyo and Woven City suggest the potential for new optimization through public-private partnerships and technology.
What will be required of Japanese cities in the future, especially regional cities, is a sense of balance that integrates the following three "hands."
-
1. Defensive measures (absolute restrictions):
We will resolutely protect "irreplaceable assets," such as Lake Toya's landscape and water sources, which can never be regained once lost, even if it means excluding market principles. -
2. Offensive Moves (Strategic Mitigation):
We will boldly relax regulations regarding the repurposing and renovation of vacant houses and encouraging people to live in central city areas, and make full use of the market's metabolic function. -
3. Eliminating time (process digitalization):
Digitalization will minimize the "wasteful costs" of delays in licensing procedures and increase the turnover rate of investments.
A city is not something that is completed on a blueprint. It is a living system woven together by the activities of countless people and the passage of time. While trusting in "God's invisible hand," we must also install "smart guardrails" to prevent it from running wild and harming itself. This is the very essence of sustainable urban management.
Related Links
- Ministry of Land, Infrastructure, Transport and Tourism: Overview and review of the city planning system
- World Bank: Doing Business Report – Dealing with Construction Permits
- Cabinet Office: Super City Concept
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