The term “smart cities” encompasses the interaction of the Internet of Things, the urban environment, and city dwellers. While these innovations have facilitated some very successful new services, smart cities have important limitations in the public sphere.

Smart city technology includes city services like bike share systems and pedestrian, transit, and driving directions conveniently accessible on smart phones. Beyond these services, however, some city leaders have plans to revolutionize city planning through smart city data. Their ideas include facilitating evacuation during emergencies, reducing traffic congestion, and lowering crime.

The proliferation of data arising from smart city tools has fostered many public policy experiments. In his book Smart Cities, Anthony Townsend covers how big data has opened up new opportunities for government service provision and government control. Townsend cites the example of Rio de Janeiro’s implementation of IBM technology as an example of the utopian thinking that smart city tools have inspired:

What began as a tool to predict rain and manage flood response morphed into a high-precision control panel for the entire city. […] Just how effective Rio’s operations center will be in taming the wild metropolis remains to be seen. Urban security experts with whom I have spoken are skeptical that it will dramatically improve the effectiveness of law enforcement, and technology experts point out that beyond the video streams there has been little investment in new sensor infrastructure to feed real-time data to the center.

Townsend points out that a key motivation of city leaders in adopting smart city technology has been creating the impression of being high tech rather than actually improving city services. He quotes the IBM team that implemented Rio’s weather forecasting and surveillance system saying, “That was a big surprise to us. We thought that this was going to be about ROI models, and the efficiency that we can produce. To some degree it is, but it’s economic development and competitiveness that’s at the heart of it.”

The use of big data to improve city services evokes the socialist calculation debate that began in the 1920s. Just as computational technology has failed to replace the price system because only the price system places incentives in the hands of the people who can take entrepreneurial action, big data provides many more opportunities for private sector firms innovating in city services relative to the public sector because policymakers don’t receive profit and loss signals about whether or not their services are working for their constituents. Townsend points out that cities including DC and New York have held apps contests for developers using municipal data. While these contests provide developers with a financial incentive to create a useful project, these apps typically haven’t been updated, and they don’t end up being user-centric products that developers create when they’re creating a product directly for consumers.

While economic calculation is only possible in the private sector where prices can guide decisionmaking, public officials also engage in dealmaking. In “The State as an Ecology of Political Enterprises,” Giuseppe Eusepi and Richard Wagner explain the human tendency to improve our situations through transactions is universal. However, in the public sector, transactions are not denominated in dollars, and policymakers don’t seek to maximize profit. Rather, they transact to win public support, gain power, or improve their financial opportunities after leaving office. Wagner describes government as a “peculiar investment bank,” in that its an intermediary between “investors” (taxpayers) and “borrowers” (the beneficiaries of public programs):

What is of particular significance is that the value of political activity can be calculated only in light of how that activity is refracted through market activity. Economic calculation requires prices as tools of calculation. But prices emerge only in the presence of alienable property. Collective property is inalienable. The internal economy of the state cannot generate prices. Prices can arise only within that part of society where property is alienable, and which is denoted as the market. Thus in a technical sense the state must act parasitically upon the market.

In the private sector, profit and loss is a disciplining force that limits the transactions that individuals will pursue. If a transaction results in a negative ROI, an investment will either change its behavior or they will go out of business. However, this isn’t true for city governments. When governments use the Internet of Things to implement new surveillance systems or judge competitions for app developers, projected ROI is not a key consideration, and projects can persist even if new products are creating little or negative value for the taxpayers who have to finance them. Smart city technologies promise many exciting services including the expansion of ridesharing, driverless cars, and efficiencies in mass transit, the importance of the price system to putting these tools to good use provides reason to believe that the most beneficial innovations will come from the private sector rather than municipal governments.