Author: marklutter

Response to Romer on private cities

Paul Romer has commented skeptically on private cities in two recent interviews. Having written on private cities I thought I would take a second to respond.

First, in his own words “And my rule is that I will not support any public policy initiative for a new city if it is not the kind of place that I would be willing to go live or where I would want my children and grandchildren to live.”

I think this is the wrong criteria for judging public policy initiatives. A better way to judge public policy initiatives is whether they improve the lives of those who are targeted by the initiatives. There are many cities throughout the world that I doubt Paul Romer or his offspring would want to live in. However, those cities are inhabited by hundreds of millions of people who want better lives for themselves and their children.

Romer does argue for experimentation and does not seem wedded to a particular organizational structure of a Charter City. I agree that openness and experimentation is necessary in creating new cities. Unfortunately, Romer specifically contrasts his vision to that of private cities, suggesting private cities should not be allowed. Before specifically answering Romer’s critique I will offer a few comments defending private cities.

The basic argument is that profit encourages the effective provision of goods and services. A private city that fails to provide those goods and services would quickly go out of business. Romer correctly notes that this analogy is somewhat lacking. Moving to a new city is high cost. As such, exit in governance terms is always more costly than exiting a grocery store, as new grocery stores are easier to substitute.

One advantage of private cities is that the initial construction of a city is very costly. A private city would mean the cost of infrastructure would be provided privately, possibly saving a government billions of dollars.

Another advantage is the distinct organizational structure. One of the primary benefits of a new city, be it Charter or private, would be to create a new bureaucracy to escape corruption in the home country. A private city would have a strong incentive ensure the bureaucracy is entirely separated. Old bureaucratic influence would be more likely in a public vs. private partnership.

Romer’s primary critique comes down to police. I will quote him in full.

The track record of private police forces and private judicial proceedings is very bad. We have some of these in the United States run by private, but non-profit, universities. If the university has a sports program that generates lots of revenue and prestige, the university tends to protect athletes, typically men, who commit sexual violence, typically against woman. They do not offer anything like “equal protection under the law.” It is a telling illustration of how police and judicial proceedings can be bent to support the mission of the organization, even one like a university that we usually think of as being well intentioned, and fail to protect the people it is responsible for.

First, I think it is odd that in critiquing private, for profit cities, he uses the example of non-profit universities. However, I agree his point stands and must be thought about. Many informal sources I have read suggest similar things happen at hotels, petty crimes by wealthy patrons are somewhat ignored. That being said, I think Romer overestimates the police, in first world countries and especially in the developing world.

As the events of Ferguson and Baltimore illustrate, police have rarely lived up to the ideal of equal protection under the law. Freddie Gray likely died because of a nickel ride, a procedure where police do not strap a suspect in a police van and then drive recklessly. Chicago PD had a black site, and before that they literally tortured people. Stop and frisk, done by several major cities, but most prominently by New York City, is essentially the continual harassment of minority males. I would recommend Radley Balko’s excellent book if Romer is interested in modern policing in America.

However, Charter Cities and private cities can do the most good in the developing world. Unfortunately I am unaware of much literature on law enforcement in the developing world. That being said, it is assuredly worse than in America. Some friends from Honduras, which is the murder capital of the world, have told me stories which illustrate how bad law enforcement can get. I heard from several people that they fear the police more than they do the maras, the gang members. Other people have told me that women being arrested are usually sexually assaulted, if not raped.

Now, given the level of violence in Honduras, I imagine the police force there is more corrupt than average. However, when thinking about how to improve the world it is important to understand the world as it exists. And the world is currently filled with terrible poverty and predatory institutions. Private cities seem like they could reasonably be better than many of those institutions.

Romer then comments, “Unless someone is willing to specify whether there is a local police chief and how he/she is appointed and held accountable, any suggestion they make about private cities can be dismissed as frivolous.”

This question does not strike me as particularly difficult. The obvious answer is the police chief would be appointed by the owner of the city, though I imagine Romer would consider that a frivolous response. They would then be accountable to the owner of the city, who would be accountable to the residents to the extent the owner would want to maximize revenue.

There are a number of other mechanisms which could be used for police. First, the police can be controlled by a non-profit. The board can be controlled by a mix of the owners, politicians, and other prominent individuals.

Another scenario, if there is a proliferation of private cities, is to unbundle the goods provided by each. Perhaps a firm dedicated to policing services will arise, and be contracted by the city itself. It has happened in Sandy Springs Georgia, among other places.

Another possible scenario is for an accreditation body to emerge which would rank various police departments. They would only give high scores to those police departments which taught best practices.

A private city would also likely lack sovereign immunity. It would be subject to lawsuits if it broke it’s founding charter. The charter could specify equal application of the law and due process procedures. Failing to follow these procedures would guarantee a loss in revenue.

Ultimately, I don’t know whether a private city would provide these goods and services or whether it would devolve into a corporate dystopia. I suspect Romer does not know either. Given our collective ignorance I would recommend, as Romer does, creating a set of meta rules for changing institutions on a local level. I would not limit the institutional experimentation, so long as the experimentation is not imposed on anyone. I would hope that Romer would not either.

The age of exit

I wrote a piece for the Freeman arguing that we are in The Age of Exit.

Instead of ideological battles, the 21st century will be defined by political decentralization. Rather than enforcing a single political model as ideal for all of humanity, people will instead choose from a sort of political menu. Political decisions will be made on a more localized level, encouraging experimentation and innovation.

I think my thesis is broadly true. However, for a short article I was unable to discuss several challenges, namely, China, Russia, the Middle East, and the EU. China has SEZs, however they are unlikely to allow the same amount of political autonomy as European nations facing independence movements. China is also pursuing assimilation policies to wipe out the Uyghur population in Xinjiang that would be untenable in Western countries. Russia is recently aggressive, however the drop in oil prices makes them less dangerous. The Middle East is having their borders redrawn. They are largely tribalist but have a unifying element in the Muslim faith. The EU has centralized some functions lowering the cost of independence movements in Europe. My thesis is overstated to the extent I do have not accounted for these counter trends.

Ultimately changing geo-political trends are very complicated and will remain so. Humans will try to draw patterns out of limited data and extrapolate into the future without fully understanding the causes of the changes. I am certainly guilty of it. However, the mainstream narrative is currently missing an important trend, one that should be included in discussions of geo-politics, that of the increased power of political autonomy on a local scale.

The analog option

Michael Gibson has written an interesting post on “How to end bad governance.” The argument is that “The diffusion of the smartphone, strong crytpography, and peer-to-peer decentralized public ledgers will weld individuals, networks and voluntary hierarchies into single units of sovereign power capable of opt-out and opt-in governance without precedent.”

Unfortunately, I do not think the argument is correct. To understand we can differentiate between types of governance, contract governance and violence governance. Contract governance is the governance system we use to resolve contractual disputes. Violence governance is the governance system we use to resolve cases of direct violence of one person against another.

Violence is inherently territorial. A given condition of humans living together is a shared set of rules over when the use of violence is acceptable. Without these shared rules there would literally be chaos. Allowing someone to opt out of those rules means they would necessarily be dangerous. Any governance system must first solve the problem of violence. It remains unclear how the block chain can.

The problem of violence is currently solved by the state. This brings us to the analog option. No matter how much of our lives we move to the digital world, the state can always knock on our door and ask for money. There is always the analog option. Opting out of the state requires more than just electronic components, it requires an ability to solve the problem of violence and a way to prevent the current state from using its regulations. Both of these occur in the world of atoms, not the world of bytes. So yes, the block chain will likely revolutionize contractual arrangements. However, it is highly unlikely it will lead to the downfall of the state as we know it.

Georgism and proprietary cities

The Economist’s newest issue is dedicated to urban land and space. The most widely accepted critique of Piketty is based on the importance of land in inequality. Henry George is proposed as a solution to Silicon Valley’s housing woes.

The common thread to these ideas is, well, Henry George. George is a figure who is very difficult to describe in modern terms. He was a combination of JK Rowling, Milton Friedman, and Ralph Nader; JK Rowling because his book, Progress and Poverty, was the most read book second only to the bible,  Milton Friedman, because he founded an intellectual movement, Ralph Nader because he entered politics as an outsider, coming in second running for governor of New York City.

Even this combination fails to do justice to George. His book was a dense treatise on political economy, hardly a bestseller today. And while Friedman was the public face of libertarianism, the movement came with a rich history and many other scholars. Further, George’s influence was so high that several communities were founded on his principles.

Looking back, the man who George most resembles in terms of influence is Karl Marx. Both wrote hugely influential treatises on political economy, inspiring both political movements and actual communities. The difference is, George’s influence waned sharply after his death, to the extent he is largely a footnote today.  People have forgotten the immense cultural influence he once was.

Unfortunately today George is only remembered for his idea of a land tax. He was also a staunch advocate of free trade. According to Tyler Cowen, one of his books, “Protection or Free Trade remains perhaps the best-argued tract on free trade to this day.” In fact, both Frank Chodorov and Albert J. Nock, now integrated into the libertarian tradition, were both heavily influenced by George.

George is coming back into the foreground primarily because of the increase in housing prices over the last few decades. After decades of land falling in importance compared to other factors of production, it is making a comeback. The rise of the knowledge economy has coincided with a rise in the importance of networks. As in person meetings are valuable for networks the land on which those networks exist rose in value as well.

The rise of property values is not the only factor sparking an interest in George. With crypto-currencies and the sharing economy income is becoming harder to track. Such factors raise the marginal cost of taxing income forcing governments to look for alternatives. As land is easy to appraise and tax, as well as necessary to live, expect governments to tax land to make up for lost revenue from taxing income.

As others have taken up the mantle for free trade, George’s legacy remains land. George argued for taxing only the unimproved vale of land, not the value of a building or agriculture on the land, only the land itself. His arguments for a land tax are relatively straightforward and can be split into economic and moral arguments.

In economic terms, land is inelastic. While taxing labor decreases the supply of labor, and taxing capital decreases the supply of capital, taxing land leaves the supply of land unchanged. His moral argument is that ownership of land is unjust because land is not created. If people own what they mix their labor with, they cannot own land as land exists independently of whether humans mix their labor.

George’s economic arguments have found a degree of popularity among well-known economists. Milton Friedman called the land tax the least bad tax. Joseph Stiglitz showed spending on public goods could increase the value of the land by the same amount as the spending itself. Even Adam Smith wrote sympathetically.

Ground-rents are a still more proper subject of taxation than the rent of houses. A tax upon ground-rents would not raise the rents of houses. It would fall altogether upon the owner of the ground-rent, who acts always as a monopolist, and exacts the greatest rent which can be got for the use of his ground. More or less can be got for it according as the competitors happen to be richer or poorer, or can afford to gratify their fancy for a particular spot of ground at a greater or smaller expense. In every country the greatest number of rich competitors is in the capital, and it is there accordingly that the highest ground-rents are always to be found. As the wealth of those competitors would in no respect be increased by a tax upon ground-rents, they would not probably be disposed to pay more for the use of the ground. Whether the tax was to be advanced by the inhabitant, or by the owner of the ground, would be of little importance. The more the inhabitant was obliged to pay for the tax, the less he would incline to pay for the ground; so that the final payment of the tax would fall altogether upon the owner of the ground-rent.

Now, before continuing it is worth noting some of the flaws of George. He did not believe he was advocating for a more efficient form of taxation.  He thought a land tax would stop business cycles and end poverty, a rather tall order. Further, a land tax is second to a pigouvian tax in efficiency terms. A pigouvian tax limits negative externalities, optimizing the level of production.

Granted, knowing the ideal level to impose a pigouvian tax is virtually impossible. Being able to differentiate between the value of a building and the value of the land on which the building is constructed is done every day by insurance companies.

The difficulty in implementing a land tax is that it is inherently redistributive. Landowners lose and renters win. As landowners typically have stronger roots in the communities they also tend to have more political power, ensuring their ability to block taxes which primarily burden them.

Land taxes would also not solve the primary problem of expensive housing, which is regulations. Nimbyism leads to onerous building codes, raising the price of housing several fold, 800% in London and 300% in Paris and Milan. The Economist reports “lifting all the barriers to urban growth in America could raise the country’s GDP by between 6.5% and 13.5%, or by about $1 trillion-2 trillion.”

The other problem that a land tax fails to solve is public choice. Even if a land tax is more efficient at generating revenue, governments rarely spend their money wisely. Spencer Heath, a follower of George, realized this. Turning Georgism on its head, Heath argued for proprietary communities, where a single owner would provide public goods. A shopping mall is a prime example of a proprietary community, providing security, lighting, public spaces, and other public goods.

The broader argument for proprietary communities is Disney World, arguably the best run city in the US. With tens of millions of annual visitors, it manages to remain clean, safe, and fun. I doubt there is major metropolitan area in the US with no dangerous parts.

Of course, Disney World is a resort, but the logic applies more broadly. Disney does a very good job taking care of Disney World because their profit depends on it. If someone is hurt or has a bad experience, Disney loses customers. The link between actions by the governing body and outcomes is much more direct than in most city governance structures.

A proprietary city would be able to gain revenue by enacting policies which increased the value of its land. While not necessarily desirable in the US, a proprietary city would likely be able to outperform many third world cities. I lived in Tegucigalpa Honduras the last five months so I will use the dysfunction there as an example, though it is hardly unique.

Tegucigalpa had several very nice bike lanes on major roads. Except they were not bike lanes, they were bus lanes. However, the buses the city had bought were too big to fit in the lanes, so the lanes were taken over by bicyclists and pedestrians. A large minority of the cars were also missing license plates. Apparently the budget for license plates ran out a few years ago and now new cars come with a letter which is stored in the glove compartment and gives the car permission to use the roads. Public schools are also atrocious, some are controlled by gangs and the leaders of several student protests were recently murdered.

Ultimately, the real problem in Honduras is the security. It remains the murder capital of the world. Having your phone stolen is an expected occurrence. Some people do not buy smartphones for this reason. Single murders are barely reported any more, there have to be two or more dead. And many people fear the police more than they do the gang members.

It is important to keep in mind the reasons above when considering proprietary cities. They do not need to be better than the first world, merely better than the competition, which in many countries is not a very high bar.

Security can be used as the most basic example. It is simple to imagine a proprietary city offering far better security than exists in Honduras today. First of all, private security tends to be more trustworthy than government police. If a private security guard is corrupt, they can be easily fired. Second, carefully monitoring the entrance and exit, as is done in all hotels and apartments already, ensures anyone committing a crime can be easily caught.

Of course, this remains speculation for now. No land developers I know of are creating open access privately administered cities on the scale I am considering. However, given the history of George’s influence. It is not unreasonable to think that a version of his ideas is revived and used to improve the living conditions in the third world.

Typology of property and anarchists

I wrote two pieces arguing for a typology of property rights. Short story shorter. Because property is a relation among men with respect to an object, we can classify property according to the relationship the property owner has with other people. The other people can be family/friends, anonymous strangers, and government. Property can also be distinguished by contracts and personal property which has the threat of violence and theft. These distinctions result in this chart.

Contracts Violence/theft
Family/friends 1 2
Anonymous strangers 3 4
Government 5 6

Below is a quote from Further typologies of property rights. 

The second part is more interesting, how to enforce contracts among anonymous strangers, 3 in the table, and how to ensure there is no violence and theft against anonymous strangers 4. Most economists are unclear on the distinction between the two options, however it is an important one. There is much evidence, international trade being the primary one, that state enforcement is unnecessary to protect contracts among anonymous strangers.  However, as Gurri pointed out, the state is likely necessary to protect against violent expropriation from anonymous strangers.

As such, the state exists less to protect private property per se, and more to protect against a specific type of encroachment on private property. In fact, given that many major American cities did not have police departments until the mid 19th century, it seems state exist primary to prevent large scale violence.

I would like to use this framework to critique academic anarchists. They tend to focus on 3 in the table, whether the state is necessary to enforce contracts among anonymous strangers. Some academic anarchists also investigate whether stable rules can emerge in chaotic situations. However, both research agendas miss the hard question 4, whether a non-monopoly of force can prevent theft and violence by anonymous strangers in a modern city like environment or larger.

To the extent anarchism is a normative project, whether it is a desirable alternative to modern first world governments is an important question. This requires a mechanism to protect against anonymous third party theft and violence. David Friedman provided the theoretical mechanism, as well as an important case study. Unfortunately, there has been little focus on this question since.

Students for Liberty will start a revolution

Students for Liberty (SFL) will start a revolution.  A real revolution, one in which a standing government steps down before they otherwise would have, as a direct result of the actions of members of SFL.  Now, while my claim will strike many as radical, I do not think it is.  I have been telling people this privately for the last two years, and I figure I might as well make my prediction on paper.  Though, before I begin, full disclosure, I am a member of Alumni for Liberty and consider many members of SFL and their staff to be personal friends.

My argument is fairly simple, many revolutions are student led.  Over the next 20 years, yes, 20 years is my timeline, one of those revolutions will be led by members of SFL or sparked by an SFL event.  An echo of this was seen the last year in Venezuela.  Because I am not bullshitting, I am willing to bet up to $100, even odds, that SFL members are named in a major news source as being the primary instigators in a revolution.  Either their actions would spark the protests, or they would become leaders in nascent protests begun for a different cause.

Of course, my claim depends on several factors.  First, the continued expansion of SFL around the globe.  SFL is not going to lead a revolution in Western Europe because the governments in Western Europe are stable.  The ability of SFL to lead a revolution depends on SFL having members in governments with less than firm foundations, Africa is the prime example, but Latin America, Eastern Europe, and the Middle East should all be included.  As of now SFL has yet to have a critical mass in many these countries, but with the continued rate of expansion SFL should have a critical mass in 5 years in the majority of those countries.

Now, my claim is not that SFL will actively seek to overthrow an existing government.  They have wisely stayed out of politics and I encourage them to continue that trend.  However, there are a number of scenarios which could unfold.  For example, Honduras won Event of the Year at the International Students For Liberty Conference the past year.  They won because they literally fought a group of Marxists who tried to shut down a University.  However, what if those Marxists had ties to a local political party.  The event nearly turned violent, and easily could have.  This could have led to more demonstrations and started a movement.

Of course, most such events remain relatively obscure.  If not for SFL, the Honduras event would be quickly forgotten.  However, such events are how many revolutions are sparked.  A student group toes the boundary one too many times.  There is a heavy handed government response.  There are protests against the heavy handed response.  The government over compensates leading to an increasing cycle of protests.

In a larger sense this is simply another part of the transformation of society in this day and age.  A group like SFL could not have existed 20 years ago.  Without the internet and low travel costs, forming a community like SFL would be impossible.  However, that community has been formed, the average payoff of protests has increased, you might go on Stossel, and the support network is stronger than ever.  So, if there are any doubters, take my bet, it should be easy money.

Edit: Lode Cossear has accepted by bet.  $100 dollars, here are the parameters further specified.

It must be reported in a top 10 US newspaper or a top 5 European newspaper, judged by circulation. At least one SFL member must be mentioned by name, along with the organization, and there must be a clear statement that an SFL event was a key instigator in the revolution or that SFLers are key members of the opposition. Lastly, the president, prime minister or equivalent party must step down. The deal will be if these conditions are met at any time in the next twenty years you pay me. If after twenty years these conditions are not met, I pay you.  The outcome of the revolution is not important, merely that it happens.  Some of the parameters are open to interpretation.  We will negotiate in good faith what constitutes “key instigator” or “key member” when the time comes.