Economics on Trial -- THE FREEMAN -- APRIL 1999

The Battle for Diamond Head:
A Case of Market Failure?

by Mark Skousen

"Hawaii's great and beloved landmark ... is too precious an asset to be sacrificed."
--Honolulu Advertiser editorial ( 1967)

Last month I addressed the theory of entrepreneurial error in conjunction with the year 2000 computer problem. This month I raise another issue dealing with the possibility of market failure: Should government protect a local landmark from commercial development? Are zoning laws and other building restrictions necessary in a free society to stop "greedy" speculators and "fast buck" promoters from creating "urban sprawl" and unsightly commerce?

Recently my family and I spent a few days in Hawaii. Walking along famed Waikiki Beach, I couldn't help noticing how a string of high-rise apartments and hotels halted abruptly along the Diamond Head shoreline.

The Story of Diamond Head

Why the sudden abatement? In the late 1960s Diamond Head was the center of a fierce debate between the developers and the conservationists. Following statehood in 1959, tourists flocked to this paradise of the Pacific, and Waikiki Beach, sandwiched between downtown Honolulu and Diamond Head, became the hottest real estate market for resort hotels and condominiums. Honolulu newspapers ran photos of a rapidly disappearing view of Diamond Head, and local citizens became alarmed. A grassroots organization, Save Diamond Head Association, was formed in 1967 and demanded a halt to building any more skyscrapers along the shoreline.

Why save Diamond Head? In the nineteenth century, British sailors found crystalline rocks on its slopes and mistook them for diamonds. Conservationists argue that Diamond Head is a symbol of paradise, the mid-Pacific's most famous beacon. One visitor wrote during the debate, "I found Diamond Head, which has been declared a state monument, in imminent danger of turning into a monument for the fast buck, its craggy profile threatened with disappearance behind a palisade of tall concrete buildings."1

Here's the conflict: Hawaii’s natural beauty and delightful climate attracted millions of new tourists in the 1960s. The tourist boom in turn created a rush in real estate development. But the high-rise buildings along with enormous billboards-were blocking out the natural beauty that attracted tourists in the first place. What to do?

The fight between the developers and environmentalists came to a head in December 1967. After a packed four-hour public hearing, five members of the nine-member city council voted against further commercial development. The other four members abstained. In 1968, Diamond Head was designated an official national landmark.

Is There a Market Solution?

Could the market properly plan for a growing Hawaii without destroying its natural beauty and aloha spirit, or must government intervene?

Sometimes the market faces a difficult choice between two conflicting goals. In the case of Diamond Head, it was the battle between development and a landmark symbol. Unfortunately, it's events like these that give capitalism a bad name. Could private developers have done better? Could it have been in their own self-interest to limit the height of hotels and condos and preserve Oahu's historic skyline while still making a profit? Can progress and profit go together?

What do free-market economists have to say about zoning and building codes? In The Constitution of Liberty, FA Hayek notes that local governments have often done a poor job of city planning, sometimes amounting to "administrative despotism."2 He cites rent controls, zoning regulations, and excessive taxation as examples. Nevertheless, he does support "some regulation of buildings permitted in cities," including minimum building codes.3

Economists have often been critical of zoning laws as an infringement of property rights. In a recent book on the subject, Tom Bethell asserts that zoning laws hurt the poor, cause urban sprawl, and invite political corruption. He points to Houston as an example of a dynamic city which has grown without zoning regulations.4

If conservationists really wanted to save Diamond Head, why didn't they buy the shoreline property and keep developers out? Instead of running to the City of Honolulu, Save Diamond Head Association should have raised the capital to stave off builders. Since 1953, Nature Conservancy, a nonprofit environmental organization with 900,000 members, has been buying and preserving land and habitats (now totaling over 10 million acres in the United States). Of course, such a plan would have been costly, with Waikiki property prices around $1 million an acre in 1967-68.

Property rights should include the right to be left alone from noise and air pollution. Should these rights also include the right of original owners to view Diamond Head?

1. Kenneth Lamott, Holiday Magazine, July 14, 1967, quoted in Helen Geracimos Chapin, Shaping History. The Role of Newspapers in Hawaii (Honolulu: University of Hawaii Press, 1996), p. 268. Chapter 26 of Chapin's book, "Above Ground: The Battle for Diamond Head," summarizes the history of this conflict through the eyes of two local newspapers, the Star-Bulletin and the Advertiser.

2. F.A. Hayek, The Constitution of Liberty (Chicago: University of Chicago Press, 1960), p. 355. Hayek devotes an entire chapter to "Housing and Town Planning," an area often ignored by economists.

3. Ibid., pp. 35457.

4. Tom Bethell, The Noblest Triumph: Property and Prosperity Through the Ages (New York: St Martin's Press, 1998), pp. 297-99.