Author: marklutter

The future evolution of proprietary cities

We live in the era of urbanization.  Currently 54% of the World’s population lives in cities, up from 34% in 1960.  Such urbanization combined with political decentralization has led to the increasing importance of cities.  Cities have been inserting themselves into conversations which earlier only included nation states.

With that in mind I would like to examine the potential growth path of proprietary cities, cities where the land on which the city is built is owned by a single proprietor.  Such cities offer two advantages.  The first is better administration.  Many developing countries are riddled with corruption.  New cities can start with a blank slate in such areas as education and public safety, escaping often dysfunctional government bureaucracies.  The second is institutional change.  Proprietary cities can offer an island where there exists rule of law and property rights protections in countries that sorely need them.

So, why would a country offer a private developer institutional autonomy?  There are a number of reasons.  The private developer could show how increased economic activity would generate more taxes.  The private developer could guarantee the creation of a certain amount of jobs.  The private developer could ensure a certain amount of investment, alleviating the need of the state to build infrastructure.  Perhaps the state realizes territorial change is far easier than country wide institutional change.

Regardless of the reason why proprietary cities are spreading, the fact remains they are spreading.  However, proprietary cities are spreading under different institutional arrangements with their host states.   There are three categories of such arrangements.  First, some are being built as joint ventures with the host state.  Second, other proprietary cities have contractual arrangements with the host state.  Lastly, some host states create a legal framework for the creation of competing proprietary cities.

A public private venture, like King Abdullah Economic City in Saudi Arabia, has several advantages.  First, governments typically have deeper pockets than private developers.  This allows greater initial investment.  Second, government involvement in the project could allow for greater institutional autonomy as the city is not entirely private, diminishing potential fears about a corporatist dystopia.  The downside is that greater government involvement means greater government involvement.  This will likely slow down any project with bureaucratic delays, as well as increasing the likelihood of further government intervention in the future.

While I do not expect public private ventures for proprietary cities will go away, they will not be the dominant form of proprietary cities either.  They will likely occupy a middle ground, used by corrupt governments to showcase a big project as well as to hand out favors to politically connected cronies.

Honduras has taken the furthest step in creating a legal framework for the creation of proprietary cities with ZEDEs.  While not proprietary cities, ZEDEs will be run by a technical secretary appointed by a government established committee, they do come close.  The ZEDE law allows for the creation of numerous competing zones.  Different developers can try different strategies to attract residents, the best strategies winning.

If Honduras sees success with the ZEDEs, similar laws will likely multiply throughout Central America.  Successful ZEDEs being copied along with the law.  It is possible other parts of the world, Africa for example, could notice the ZEDEs and copy them.  However, ultimately I am skeptical ZEDE style laws will grow beyond Central America.  Drafting such laws so as not to be corrupted by the political process is extremely difficult and there is no interest group which would push for the passage of such laws.

The most promising long term strategy, but likely the most difficult short term, is proprietary cities having exclusive contracts with their host states.  A city developer could draw up a contract and offer it to several different governments, promising increased tax revenue and the creation of new jobs.  The developer in return would ask for a degree of institutional autonomy to help the city flourish.  The main stumbling block is there does not exist any developer with enough experience or expertise to credibly offer such a contract.

However, as proprietary cities achieve success in other areas, such as Honduras, the skills necessary to create such a contract and credibly offer it will emerge.  Companies investing in ZEDEs and similar autonomous zones will begin to acquire the skills necessary for large scale expansion.  Eventually, private companies will competently be able to offer hundreds of millions to billions of dollar investments in new cities.  Such potential investments will give them strong bargaining power in asking for institutional autonomy.

Proprietary cities are likely to continue to compete with traditional city governments.  The success of proprietary cities will depend on the degree of institutional autonomy they obtain from host countries which in turn will depend on the mechanism by which they are able to exist in the host country.

Review of The End of Power

The End of Power by Moises Naim is the most interesting book I have read in a while.  It advances the simple thesis that power, defined as “the ability to direct or prevent the current or future actions of other groups or individuals”, is declining.  The way I prefer to put it, the choice set of our leaders has become more constrained.

Naim argues that power, not just political power, but corporate and military power is declining.  A thought experiment can be as follows.  Compare Barack Obama to a 13th century king.  While Obama undoubtedly commands more resources, his choice set is fairly limited.  There is constant pressure applied by various interest groups which constrain him.  A 13th century king, on the other hand, has a wider choice set.  He likely has a few advisors, but is largely free to act in any way he so chooses.

Naims thesis can be interpreted as a generalized form of the trend toward political decentralization that some have documented.  In fact, Naim discusses such political decentralization, both arguing for and admitting the inevitable political innovation.  He puts his thesis in grandiose terms, comparing the coming innovation to the Greek city state democracies and the French Revolution.

What Naim didn’t include was an explanation of why power is ending or a judgement of whether such an end is a good thing.  I’ll try to provide a brief account of both.  First, the world can be imagined as a series of networks representing the relationships between people.  The further intertwined the networks are, the less power individuals have.  They are constrained to follow the rules put in place by those in their networks.  In other words, the decline of power is inevitable as the world becomes more interconnected.  This is a good thing because making actions predictable is a necessary, though not sufficient, step for long term planning and economic development.

Naims book is also interesting because he represents the power elite.  He was both a former executive director of the World Bank as well as editor in chief of Foreign Policy.  The book has a blurb by Bill Clinton on the front.  Other reviews include The Wall Street Journal, The Washington Post, and George Soros.

I highly recommend this book to anyone interested in changing forms of governance and politics more generally.

Bursting my bubble

Yesterday was the first meeting for the first Students for Liberty club in Honduras.  I spoke briefly about the Zonas de Empleo y Desarollo Economico (ZEDEs).  There followed a wide ranging discussion about the advantages and pitfalls of the ZEDEs.  While the students seemed to grasp the potential, they feared the political process would corrupt the outcome, worrying that the ZEDEs might end up being used to enrich politicians at the expense of everyone else.

Afterwards I had a few drinks with Christian Betancort, a SFL representative from San Pedro Sula who had also been present at the talk.  It was my first extended discussion with a libertarian in Honduras and helped clarify my thoughts about the different social dynamics in moving to Honduras.

To put it bluntly, the culture shock of leaving the DC libertarian bubble has been far greater than the culture shock of living in Honduras.  Libertarians, as I imagine most social groups, have their own assumptions about knowledge, and even language, that is particular to them.  For a basic example, libertarians have a fairly particular definition of freedom.

I realized what has been most difficult for me socially is shifting out of the libertarian mindset.  Most foreigners in Honduras work for NGOs or teach.  Competition and commerce is not immediately assumed to be good.  Public choice problems are not implicit in discussions of government.  Cultural reference points for libertarians, and even DC residents in general, don’t exist.  People don’t know what a think tank does.

While I have spent most of my adult life in the libertarian bubble, I realized it was a bubble.  What I didn’t realize is how differently it functioned from other social organizations.  I had assumed other societies had similar bubbles.  There would be a progressive bubble, a Silicon Valley bubble, etc.  What I now realize is that such well defined bubble are the aberration, not the norm.  The NGO bubble is far less clearly defined than the libertarian bubble.  The sense of shared ideas and mission are weaker.  The social bonds function in a different, weaker, way.

I am not sure why this is.  It could be a testament to the power of libertarian ideas.  It could be due to libertarian organizations.  To some extent, it is probably due to both, though it is unclear why libertarians should have advantages in over other goal oriented social groups.  I would have expected development workers to have a similar canon of books, a similar private language, a similar sense of shared mission.

I now believe the libertarian movement is more unique than I did before.  Its social organization seems superior.  I am very excited to help extend this circle to Tegucigalpa and beyond.

Private cities and public places

Have you heard the old libertarian joke?  It goes like this.  Should heroin sales to minors be legal on public sidewalks?  The libertarian responds, why are there public sidewalks?  The libertarian answer captures a certain truth.  Conflict arises when spheres of action, the set of actions deemed by others as reasonable, are ill defined.  Private property denotes clear spheres of action, thereby minimizing conflict.  By resorting to private property instead of public property, questions of appropriateness of certain courses of action are taken out of the public sphere.  In essence, the joke says the sales of heroin (I will ignore the aspect of children) should be a private matter.

However, while I believe the public sphere is currently too big, I do not believe the optimal size of the public sphere is zero.  The following essay is my attempt to square my advocacy for private or proprietary cities, cities where a single entity owns the land on which the city is constructed and leases it to renters, with my belief in a public sphere.

First, one can distinguish between what might be termed an economic (or crude) defense of proprietary cities vs a holistic (or liberal) defense.  An economic defense would solely consider whether people vote with their feet.  If people choose to move to the proprietary city, it is better than their alternative options.  A holistic defense considers more than just people voting with their feet.  It questions whether proprietary cities can offer adequate protections for civil rights.  Will there be a healthy civil society, freedom of speech, freedom of association, due process for those accused of crimes.  In short, will a proprietary city be an extension of the modern liberal order, or a subversion of it.

As an economist I am very sympathetic to the economic arguments.  In fact, all other things being equal, more crude proprietary cities are better than fewer.  However, all other things are not equal.  Crude and liberal proprietary cities are, to some extent, substitutes.  This is especially true for the first proprietary cities, whose success (or failure) will likely determine the future evolution of proprietary cities.

Dubai, though not a proprietary city itself, offers a glimpse of what crude proprietary cities could become.  A society segmented by class, South East Asians providing the manual labor, admittedly at higher wages than they could get at home, but without many basic freedoms, and Europeans.  There is little mixture between the classes, and no hope for the South East Asians to enter the upper class.

On a more theoretical level, we can consider the limits of proprietary cities.  Private spheres allow for action that is unacceptable in public spheres.  If you visit my house, I am perfectly within my rights to restrict your actions.  I may ask you not to voice certain opinions or to enter without my permission.

This line, however, becomes blurry as private spaces enter commercial arrangements.  The argument for banning discrimination based on race is that business is fundamentally different from residence.  The sphere of action businesses can take is more restricted than the private sphere one can take in one’s home.

As nominally private enterprises scale, the distinctions further blur.  In a company town, should the company be legally allowed to restrict speech critical of the company?  Aside from legality, morally, should it?

When considering proprietary cities, we can compare Dubai and Hong Kong.  Do we want a city where manual laborers are second class citizens, unable to participate in the public sphere, or a city where the poor have comparable opportunities to the wealthy?  Hong Kong is obviously not an ideal liberal city, but it is far ahead of Dubai.

I have argued that proprietary cities be given institutional autonomy as well.  With such autonomy it seems reasonable for the host country to ask for certain procedural safeguards for civil liberties.  A bill of rights, if you will, protecting the residents rights to speech, religion, association, protest, fair trials, and more.

While I strongly support political decentralization, there are differing visions on how a decentralized world would appear.  It could be fragmented into different groups, with little trust and interaction between the groups, with no group representing liberal ideals.  On the other hand, decentralization could allow us to escape modern tyranny, experiment with better governance, and kept intact basic values which continue to hold us together.  With regard to proprietary cities, the latter must be fought for.

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We should send the Swiss to space

I started a new blog with a couple of my fellow George Mason PhD students and friends. Well, they started it, I tagged along. You know it’s going to be awesome because of the name, Calculus of Dissent. The blog will be a bit more technical and academic oriented than here, focusing on our research. Given this is my blogging home and it fits my eclectic tastes rather well, most of my blogging will remain here.

My first post was on who we should send to colonize space. Hint, its the Swiss.

Consider the following thought experiment. Earth is dying, unable to further sustain human life. Mankind has thrown their last resources into creating a space ship that can reach a habitable planet. However, the space ship can only carry 10,000 people and little is known about the planet beyond gravity and oxygen levels. With the literal fate of humanity lying before us, who do we send and why?

My post was picked up by Nick Land who expressed shock and bemusement at my tone, though I suspect he agreed with my reasoning. I took that tone because as an economist playing the outside observer helps alleviate bias, as well as my perhaps naive belief that most people are reasonable.

I do not believe anything I wrote was terribly controversial, though that is perhaps more symptomatic of my bubble than anything else. Land seemed most surprised by my nonchalant tone arguing for sending a single culture to colonize space. What I said is not particularly controversial among economists. There is a large literature on the (negative) relationship between ethnic homogeneity and various outcomes.

The economic theory is fairly uncontroversial. People tend to trust their in groups more than out groups. High ethnic fractionalization is linked to low trust, among other things. This become especially problematic with modern states as no ethnic group wants to trust the other with state power. Mark Weiner gives a persuasive account of how an important aspect of the creation of the modern nation state was wiping out tribal affiliations.

The common sense theory is similarly uncontroversial. We would not want to send a stone age tribe which murders strangers to colonize a new world. Similarly, we can rank, though there would admittedly be some disagreement, which cultural groups have traits that are most likely to lead to success colonizing a new planet.

Basically, this is a long winded way of saying you should check out my new blog. Here it is again in case you’re lazy.

(Image source)

Should Google run a city?

The Freeman was nice enough to publish my piece asking whether Google should run a city.

Would you want to live in a private city?

No? What if Google were running the city? Would that change your mind? Google building and running cities is less crazy than you think.

Google has expressed interest in constructing cities, and Larry Page wants to create autonomous zones that can experiment with social rules. Combined, these two ideas have the potential to transform the world. Institutional change can jumpstart economic growth while competent, efficient administration can ensure those gains are not lost to corruption.

I think Silicon Valley could become an extremely powerful force for local autonomy. They have the money and interest. That being said, I believe they have much to learn on the political and legal side. However, they are hardly alone in that respect. Few understand the importance of legal institutions to economic development.