Economics

Network

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.

The USA still has the world’s worst corporate tax rate

I published a blog post at FreedomWorks on international corporate tax rates — and how far we’ve fallen behind everyone else.

The Tax Foundation has recently published a report that analyzes the tax policy of the thirty-four Organisation for Economic Development (OECD) member countries, which are more or less all of the advanced economies in the world. The results are jarring. The United States ranks 32 out of 34 in terms of the competitiveness of our taxation – only Portugal and the Socialist-led France rank lower than we do. The main factor in in this embarrassment is our bush league corporate tax rate. The Tax Foundation makes it clear: “The United States provides a good example of an uncompetitive tax code… The largest factors behind the United States’ score are that the U.S. has the highest corporate tax rate in the developed world and that it is one of the six remaining countries in the OECD with a worldwide system of taxation.”

While the rest of the world has been reforming its tax codes, the United States has been left in the dust. The last major change in the US occurred in 1986, and since then, OECD average corporate tax rate has practically been cut in half. Corporations are leaving our shores, as Logan Albright pointed out, and our uncompetitive policies makes investment a bad idea in the first place.

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No panaceas: Libertarian challenges to open borders

Traditionally, libertarianism has welcomed a plurality of views on the immigration question. While nearly all free market proponents agree that current government policies restricting freedom of movement around the world are riddled with problems, we lack a consensus on what exactly these problems are and what should be done to solve them. However, it seems that a growing segment of (mostly young) libertarians are becoming more vocal in their view that unequivocal support for open borders should be *the* libertarian position on immigration. These libertarians tend to emphasize the moral case for open borders, though folks like Bryan Caplan have done a good job of presenting the economic benefits as well.

Unfortunately, advocates of open borders almost always fail to acknowledge important and fundamental tradeoffs when it comes to immigration. As Gene Callahan has written recently, it is strange that libertarian economists, who are usually eager to point out that there’s no such thing as a free lunch, “treat immigration as if it were immune to this principle, and argue as if unlimited immigration is simply an unalloyed bundle of benefits with no associated costs.” Advocates of open borders should recognize that not all opposing arguments are veiled conservative prejudices rooted in xenophobic hysteria and that there are practical downsides worthy of consideration. Here, I will discuss some of these legitimate challenges to open immigration. But first, a few disclaimers on what I will not be arguing.

I will not be arguing that the potential costs of open borders necessarily outweigh the potential benefits. I suspect there isn’t enough evidence to make a compelling case either way and I’m certainly not informed enough to adopt a strong position on the subject. Ultimately, I think that some level of immigration fosters innovation and the exchange of ideas and I have no doubts that the majority of immigrants are hard-working, honorable people who just want the opportunity to create a better life for their families. Nor will I be arguing that the practical challenges of open borders should necessarily drown out the moral arguments, which I generally find compelling. In fact, my path to becoming a libertarian began when I was exposed to the corrupt and unfeeling actions of several bureaucrats towards Haitian immigrants in a congressional office where I interned during high school.

However, I am very skeptical of what appears to me to be an emerging tendency to institute a libertarian litmus test around open borders and a reluctance to engage in a conversation about the many tradeoffs of such a policy stance. I would like to push back against the tendency of open borders advocates to frame the conversation as if immigration is a zero sum game. A writer at SpawkTalk has criticized Bryan Caplan for such framing:

He [Caplan] analyzes whether immigrants on the whole depress native wages, or whether immigrants as a whole use a lot of welfare, etc. It seems to not occur to him that there may be a good case for restricting immigration even if immigrants as a whole do no net harm. After all, some subset of immigrants might do harm in these various areas even if immigrants on the whole do not. And so it would make sense to ban this subset of immigrants from immigrating to your country. Just about no one actually advocated banning all immigration. And yet this is the position that Caplan’s analysis directly argues against. In so doing it fails to address the vast majority of proposals for immigration restriction actually in existence.

It’s especially worth lingering on the point that virtually no one is calling for a ban on immigration across the board. In fact, there is probably no other policy position more implicitly excluded from mainstream debate than immigration restriction. Nearly everyone is against it, from Brookings to Karl Rove to the ideological left to libertarians — and most have self-interested reasons for doing so; the business right wants cheap wages, the left wants more voters, and so on. Advocating for open borders isn’t as radical of a position as many libertarians make it out to be.

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Sometimes smaller is worse

While I am a huge fan of decentralization, it is important to be cognizant of the potential negative effects.  Proponents of decentralization argue that local governments are more responsive to the needs of people.  However, local governments can be dominated by local special interests, restricting the overall level of freedom.

This tension was apparent during the drive to Burning Man.  Many towns would pull over cars, ticketing them for any perceived traffic violation.  This would have no negative effect on the elected officials as out of towners don’t vote.  A more insidious example is Ferguson and the broader St. Louis area.  They weren’t ticketing one time passers through, but oppressing an entire population, keeping them impoverished.

Zoning restrictions are another example.  Japan decides zoning policy on a national level, and as such, Tokyo has cheaper housing prices than San Francisco.  This is because the property owners in Tokyo are unable to effectively lobby the national government, while San Francisco property owners are much closer to the relevant decision making body.

This point can be brought back the the 16th, 17th, and 18th centuries and the building of the nation state.  One of the primary advantages of the modern nation state was its ability to crush local monopolies.  Rivers which previously had tolls every mile for a different fiefdom would be traveled at much lower cost.  By crushing the local monopolies the modern nation state created a free trade zone within its borders.  This allowed Britain to experience the industrial revolution, overtaking the rest of Europe, despite having higher tariffs than France.

The question advocates of political decentralization must ask is, under what circumstances will the benefits of local governments outweigh their costs? Moving cities is already much cheaper now than previously, increasing the elasticity of demand for local governments.  Trade, rather than plunder, is also a far greater part of wealth today.  Another option is a shareholder state, one where the incentives of the population are more closely aligned with the ruling class than most forms of government.