David Friedman seems to be arguing that proprietary communities are pretty much like local governments, only better.
This is incorrect, at least in Pennsylvania.
There are some pretty important things proprietary communities can't do that even local governments can. In particular, they cant't put you in jail and they can't tax people who don't own real estate in the community. Also, no eminent domain.
At the same time, they can do things that government can't. They are mostly unbound by the bill of rights. And they typically if not always restrict voting rights to those that own real estate. Bug or feature? You decide. Or not. I'm going with bug, myself.
The most dysfunctional community of which I have personal knowledge was a proprietary community in Northwestern Pennsylvania. The developers had strong incentives to make the development appear attractive, but none to make it actually be attractive. Once the lots were sold it wasn't their problem.