Economics

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)

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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.

Why state capacity matters

Bryan Caplan is skeptical of the state capacity literature. I believe that state capacity is important. Unfortunately, everyone I have read on the subject gives an unconvincing explanation for its importance.

Timothy Besley and Torsten Persson, the economists who write most frequently on the subject, argue state capacity is important for two reasons. First, the ability to tax leads to states providing public goods. Second, the ability for the state to provide a legal system encourages investment.

The importance of public goods seems overstated. Robert Fogel found that railroads, many of which were built privately, only increased GDP by 2.7% in 1890. Given the relative importance of railroads compared to other public goods, it seems unlikely the ability to pay for public goods is the important aspect of state capacity.

Similarly, the provision of legal services by the state is unconvincing. Daron Acemoglu and Simon Johnson unbundle institutions, distinguishing between private property and contracting institutions. Private property is protection from the state while contracting is protection from private predation. They find protection from the state is far more important for economic development than protection from private predation. People don’t need the state to protect property rights, only to get out of the way.

So, in spite of this, why do I believe in the importance of state capacity. As an aside, I claim no originality, this is my reading of Douglass North and I am confused why no one else seems to have picked up on it. State capacity is important for controlling violence. A weak state is unable to effectively control violence. As such, it is beholden to numerous groups. These groups support the state because the state provides them with rents. A strong state is far less beholden to such groups. As such, a strong state is able to allow for economic freedom. A weak state is threatened by the wealth economic freedom creates.

Further considerations must be made. State capacity is not a good thing in and of itself. It must co-evolve with constraints on government. State capacity without such constraints results in Nazi Germany. However, too weak state capacity results in the modern Congo.

Lastly, to answer a question put by Peter Boettke on Facebook. Why do I believe state capacity is an important part of the explanation of the success of Western Europe? My reading of the history of the late middle ages is that the primary advantage of the modern nation state was its ability to crush local monopolies. England, as John Nye points out, had higher tariffs than France for much of the 20th century. The advantage of England was its internal free trade. State capacity ensured goods could move freely in England, when prior they would be taxed at every semi-autonomous jurisdiction.

Networks, the internet, and Coase

I am reading The Revolt of the Public and the Crisis of Authority in the New Millennium by Martin Gurri. It is about the spread of networks and how they challenge traditional hierarchical organizations. So far, it seems to fit into the broader narrative of the decline of traditional types of authority, being replaced by networks. This narrative includes the spread of the sharing economy, Uber, AirBnB, the blockchain, Bitcoin, as well as the loss of trust in governments.

While reading I had a realization, that in retrospect seems obvious. However, I have yet to read anyone else make the claim I am about to very explicitly, so I feel it is worth blogging about.

The decline of hierarchy and the growth of networks fits perfectly into Coase’s theory of the firm. Coase, in his famous 1937 article argues that firms exist to reduce transaction costs. What he calls firms can be interpreted more broadly as hierarchical organizations, including the traditional nation state. The spread of the internet has lowered transaction costs. The benefits networks at the expense of traditional hierarchies. No longer do we have to book flights through a trusted travel agency, we can get them directly from the airlines. We can buy goods from anonymous strangers because a rating mechanism guarantees their trustworthiness.

The ability to network has empowered people to circumvent the firm. Coase asked, why have a firm, why not contract everything. As transaction costs fall more people will contract, rather than use a firm. Perhaps the most interesting aspect is we have yet to fully exploit how the internet can lower transaction costs. Electricity took 40 years to be fully integrated into everyday life. If we assume a similar time frame for the internet we can expect another 20 years of innovation, much of it being geared toward lowering transaction costs. How firms, and more interestingly the nation state, evolve in response should be watched closely.

Private cities around the world

The PanAm Post was kind enough to publish a piece I wrote about private cities around the world. Below is an excerpt.

First, private cities could provide better administration of public goods (e.g. security, roads, sewage, and clean water), because the income of the developer is linked to his ability to attract residents. City owners are incentivized to provide valuable goods and services.+

The second, and more important reason, is that private cities incentivize institutional change. Economic freedom leads to economic growth, which increases the value of the land on which the city resides, benefiting the developer. As such, private-city owners have a strong incentive to lobby their central or state governments for a degree of institutional autonomy to increase their competitiveness.

The Honduran ZEDEs, though not as far along as projects mentioned in the piece have the most potential as they have the most institutional autonomy. Honduras has even inspired their neighbors, El Salvador and Costa Rica to begin to consider laws of their own to allow institutionally autonomous zones.

The spread of private and/or institutionally autonomous cities is happening faster than I expected.

Private cities and state capacity

Last summer I took a bus from Honduras to El Salvador. The bus left at 6:00 AM because, I was told, if it left later it would cross the border in the dark and risk being robbed by highway bandits. A few years ago, I took a bus from Lima to Pulcalpa, both in Peru. In the Amazon we stopped and a man in army fatigues with a rifle strung over his shoulder boarded and asked for “donations.”

I bring these stories up to illustrate the importance of state capacity, which can simply be defined as the ability of a state to exercise its power. In the above situations state power would ensure I wouldn’t be robbed or asked for “donations” by men with guns. One tyrant is often better than many. State capacity also means the ability of the state to complete certain tasks, build a road, effectively tax subjects, etc.

The recent Ebola crisis offered a useful perspective on state capacity vs. private city capacity. An 80,000 person rubber plantation run by Firestone successfully stopped Ebola, despite having no prior experience with such diseases. Instead they simply used common sense and extensive googling to figure out how to best respond. The whole article is worth reading if you haven’t already.

Garcia’s team first tried to find a hospital in the capital to care for the woman. “Unfortunately, at that time, there was no facility that could accommodate her,” he says. “So we quickly realized that we had to handle the situation ourselves.”

The case was detected on a Sunday. Garcia and a medical team from the company hospital spent Monday setting up an Ebola ward. Tuesday the woman was placed in isolation.

“None of us had any Ebola experience,” he says. They scoured the Internet for information about how to treat Ebola. They cleared out a building on the hospital grounds and set up an isolation ward. They grabbed a bunch of hazmat suits for dealing with chemical spills at the rubber factory and gave them to the hospital staff. The suits worked just as well for Ebola cases.

The lesson which should be learned is that though institutional change is hard on a whole, institutional subcontracting can work. Trying to better Liberian institutions could take decades for such results. On the other hand, a private city with an interest in the well being of its residents can deal with a deadly epidemic better than most governments. It can probably do other things better too.