Kicking the Backside of the State with an Invisible Foot
It may disenchant some that we consistently compare governments to firms competing in a market. As firms compete for customers, ideally nations should compete for citizens.
To say the same dynamic at play between Coke and Pepsi also occurs between the U.S. and Canada appears to the patriotic as heresy. But what we lose in forgoing the emotional charge of God and Country, we gain in understanding. Let me rephrase Edward Gibbon’s thoughts on Christianity and Roman history to suit my point: the political philosopher may indulge the pleasing task of describing Justice as it has descended from Reason or Heaven, arrayed in its purity. But a more melancholy duty is imposed on the Thousand Nations blogger. He must discover the inevitable mixture of error and corruption which Justice has contracted in its long residence upon the earth, among a weak and degenerate race of beings.
One key claim we make is that the goods of civilization (human flourishing and prosperity, respect for basic rights) are not founded on the long term resilience of particular governments. In fact, and perhaps more controversially, we hold the opposite to be true–long term resilience at the level of the state dampens the rate of improvement in the quality of governance and, ultimately, economic growth as well. One driver of this stagnation is the Olsonian story about accumulating special interests sapping the dynamism of an economy until it petrifies. Another is how democracy skews toward short term thinking. Policy makers generally aim to craft policy that will help them win the next election, a goal often but not always at odds with long term wealth creation and the preservation of human rights.
The main mistake most political theorists make is to assume that the macro-resilience of worldwide prosperity arises from the micro-resilience of a particular state and its national rule set. In other words, subsystem stability–preserving particular national rule sets–is taken to bolster the larger system of global governance.
But that claim is mistaken. The truth is that a certain kind of micro-fragility leads to macro-resilience in a complex adaptive system.
Over at the Macroeconomic Resilience blog, Ashwin Parameswaran has been pursing this line of inquiry with respect to the global economy. But I can’t help but draw analogies to the market in governance. Parameswaran writes:
Although it is typical to equate resilience with robustness, resilient complex adaptive systems also need to possess the ability to innovate and generate novelty. As Allen and Holling put it : “Novelty and innovation are required to keep existing complex systems resilient and to create new structures and dynamics following system crashes”. Evolvability also enables the system to undergo fundamental transformational change – it could be argued that such innovations are even more important in a modern capitalist economic system than they are in the biological or ecological arena. The rest of this post will focus on elaborating upon how macro-economic systems can be both robust and evolvable at the same time – the apparent conflict between evolvability and robustness arises from a fallacy of composition where macro-resilience is assumed to arise from micro-resilience, when in fact it arises from the very absence of micro-resilience.
The point is that the overall health of an economy is determined by the underlying chaotic churn, the creative destruction that occurs at the level of the firm. And while the invisible hand of the price system guides producers and consumers to the most efficient allocation of goods, it is the invisible foot that kicks firms into a race to produce disruptive technologies. (And remember, national rule sets are a kind of technology.) So what is the invisible foot?
The concept of the “Invisible Foot” was introduced by Joseph Berliner as a counterpoint to Adam Smith’s “Invisible Hand” to explain why innovation was so hard in the centrally planned Soviet economy: “Adam Smith taught us to think of competition as an “invisible hand” that guides production into the socially desirable channels….But if Adam Smith had taken as his point of departure not the coordinating mechanism but the innovation mechanism of capitalism, he may well have designated competition not as an invisible hand but as an invisible foot. For the effect of competition is not only to motivate profit-seeking entrepreneurs to seek yet more profit but to jolt conservative enterprises into the adoption of new technology and the search for improved processes and products. From the point of view of the static efficiency of resource allocation, the evil of monopoly is that it prevents resources from flowing into those lines of production in which their social value would be greatest. But from the point of view of innovation, the evil of monopoly is that it enables producers to enjoy high rates of profit without having to undertake the exacting and risky activities associated with technological change. A world of monopolies, socialist or capitalist, would be a world with very little technological change.” To maintain an evolvable macro-economy, the invisible foot needs to be“applied vigorously to the backsides of enterprises that would otherwise have been quite content to go on producing the same products in the same ways, and at a reasonable profit, if they could only be protected from the intrusion of competition.”
The same result obtains with provision of government services. Not only does government monopoly block a more efficient allocation of resources, but it also stifles innovation in the creation of new rules. A world of monopoly in governance is a world with little beneficial political change. For just as it is necessary to apply the invisible foot to the backsides of firms, so too must we find a way to apply a commensurate pressure on the backsides of sluggish governments. We need the intrusion of competition. And the force of the invisible foot is directly related to the number of new firms who can freely enter a market. Parameswaran writes:
Burton Klein’s great contribution along with other dynamic economists of the time (notably Gunnar Eliasson) was to highlight the critical importance of entry of new firms in maintaining the efficacy of the invisible foot. Klein believed that “the degree of risk taking is determined by the robustness of dynamic competition, which mainly depends on the rate of entry of new firms. If entry into an industry is fairly steady, the game is likely to have the flavour of a highly competitive sport. When some firms in an industry concentrate on making significant advances that will bear fruit within several years, others must be concerned with making their long-run profits as large as possible, if they hope to survive. But after entry has been closed for a number of years, a tightly organised oligopoly will probably emerge in which firms will endeavour to make their environments highly predictable in order to make their short-run profits as large as possible….Because of new entries, a relatively concentrated industry can remain highly dynamic. But, when entry is absent for some years, and expectations are premised on the future absence of entry, a relatively concentrated industry is likely to evolve into a tight oligopoly. In particular, when entry is long absent, managers are likely to be more and more narrowly selected; and they will probably engage in such parallel behaviour with respect to products and prices that it might seem that the entire industry is commanded by a single general!”
Entry into the market as a government service provider is extremely rare. Creative destruction at the level of the state is non-existent. Charter Cities and Seasteading are efforts to eliminate or lower the cost of that barrier. But without any other solutions on the horizon, are we surprised that it appears as though the entire government industry has evolved into a tight oligopoly?
David Friedman on “Democracy is the worst form of government except for all the rest.”
In the comments on a controversy at Volokh Conspiracy, David Friedman provides the most sensible interpretation of the famous quotation “Democracy is the worst form of government except for all the rest.” Far from a backhanded compliment for democracy, the correct interpretation is that we should do as little by means of government as we possibly can:
I think the obvious implication of that quote, although not the one most people draw, is that all forms of government work pretty badly, hence one should, so far as possible, avoid doing things via government. It is, for instance, an argument for vouchers over public schools, or for an entirely private schooling system over vouchers.
It’s also an argument for not assuming that if you take a controversy to the government courts you will get a just result. Hence, in comparing that to private alternatives, including use by the parties to a dispute of non-governmental mechanisms for resolving it, you should assume that neither method can be counted on to give a just outcome, and choose between them allowing for the likely faults of both.
We might have to keep doing national defense via democracy for a few decades, but in the meantime let’s move as many other systems over to private supply as we can as quickly as we can. And, as Caplan and Stringham point out, in principal all we need to do so is to allow private arbitration agreements to be binding, though governments would still take our tax monies.
Jurisdictional Arbitrage, Native American Style
New York’s Oneida Indian Nation moved a cigarette-manufacturing plant to their upstate reservation to shield smokers from steep taxes that Governor David Paterson has vowed to impose.
“By moving the plant to the Oneida homelands, the Nation is availing itself of a long-settled law that recognizes the right of Indian tribes to sell products they manufacture on their own reservations without interference from state tax laws,” tribe officials said in a statement.
New York for more than a decade has tried but failed to force Native Americans to collect cigarette and fuel taxes from their reservation stores. The tribes, who say they do not have to charge the levies because they enjoy sovereign immunity, face another test on September 1, when the state will begin requiring cigarette wholesalers to prepay the taxes before supplying reservation stores.
Michael Strong wrote about leveraging Native American sovereignty into a robust market in governance as part of our Independence Week blogging.
Recycled Island
Here’s a project which should be interesting to seasteaders:
Recycled island is a research project on the potential of realizing a habitable floating island in the Pacific Ocean made from all the plastic waste that is momentarily floating around in the ocean.
The proposal has three main aims; Cleaning our oceans from a gigantic amount of plastic waste; Creating new land; And constructing a sustainable habitat. Recycled island seeks the possibilities to recycle the plastic waste on the spot and to recycle it into a floating entity. The constructive and marine technical aspects take part in the project of creating a sea worthy island.
The main characteristics of the island are summarized:
1. Realized from the plastic waste in our Oceans. This will clean our Oceans intensely and it will change the character of the plastic waste from garbage to building material. The gathering of the plastic waste will become a lot more attractive.
2. The island is habitable, where it will have its value as land capturing and is a potential habitat for a part of the rising amount of climate refugees.
3. The habitable area is designed as an urban setting. Nowadays already half of the World population lives in urban conditions, which has a huge impact on nature. The realization of mixed-use environments is our hope for the future.
4. The island is constructed as a green living environment, from the point of view of a natural habitat. The use of compost toilets in creating fertile ground is an example in this.
5. It is a self sufficient habitat, which is not (or hardly) depending from other countries and finds its own resources to survive. The settlement has its own energy and food sources.
6. The island is ecologic and not polluting or affecting the world negatively. Natural and non polluting sources are used to let the island exist in harmony with nature.
7. The size of the floating city is considerable in relation to the huge amount of plastic waste in the Ocean. The largest concentration of plastic has a footprint the size of France and Spain together. Starting point is to create an island with the coverage of 10.000Km2. This is about the size of the island Hawaii.
8. The location is the North Pacific Gyre, where at this moment the biggest concentration of plastic waste is discovered. This is geographically a beautiful spot North-East to Hawaii. By recycling and constructing directly on the spot with the biggest concentration of plastic waste, long transports are avoided. Because of the floating character the position could eventually be altered.
Unfortunately, collecting thinly-spread garbage to make an island is unlikely to make sense economically. Still, it’s nice to see environmentalists working to create floating cities!
Hat tip: Hefe Vice.
2081: A World Without Exit
One great thing about attending this year’s non-Ephemerisle was the chance to mingle among a frenetic batch of the talented, the manic, the brilliant, and the mildly and fantastically insane. Some woman performed trapeze at 2 am, hanging over the river from a makeshift scaffold on a house boat. I kid you not. And yet despite the ad hoc nature of it all, there were a handful of thought provoking talks on the “Memocracy” boat–anything from how to manage your sleep schedule to Google’s educational policy research. One outstanding talk was given by Thor Halvorssen on his work with the Human Rights Foundation. In case you haven’t heard of it, do check out some of HRF’s efforts to promote liberty in the Americas, especially their work to free prisoners of conscience–harrowing tales, one and all. But besides founding HRF, and organizing the Oslo Freedom Forum, Thor also produces movies. I finally obtained a copy of his short film adaptation of Vonnegut’s Harrison Bergeron. It’s called 2081 and I can’t recommend it highly enough–an awesome parable on the inhumanity of a fierce egalitarianism enforced by state power. Here’s a the trailer (you can buy a copy on Amazon):
David Sloan Wilson Hankers After a Paradigm Shift in Economics
The prominent evolutionary biologist is on a tear at his Evolution for Everyone blog. He has a string of posts on the gaps between our knowledge of human nature and the assumptions economists make in their predictive models. Here is the first in the series. Wilson wants to tame some wild views in economics–namely, that self-interest is king–and, with the help of his Institute, he hopes to create better regulations and public policy recs based on more realistic assumptions about human behavior. All well and good.
In evolutionary biology, Wilson is best known for his pioneering work on multi-level selection theory, which looks at the ways evolution occurs at the group level in addition to the individual. On this view evolution is comprised of a nested hierarchy of embedded evolutionary systems, from the group to the individual to the cell to the gene. For a very insightful application of this theory to religion and community, I highly recommend his brilliant Darwin’s Cathedral. When applied to national rule sets, I call his multi-level selection theory competitive governance. But now I’m getting ahead of myself.
Based on Wilson’s string of posts, he fits squarely into what Arnold Kling describes as the MIT mantra: markets fail, let’s use government. He devotes a lot of space to pointing out the fallacies in Milton Friedman’s 1953 paper on positive economics (see here) and on describing (what he sees as) the inadequacies of the invisible hand. He also hates Ayn Rand and “market fundamentalism.” However, a lot of his posts seem blissfully unaware of public choice problems, almost as if there could never be government failure or democratic fundamentalism. I begin to wonder–is Wilson willing to apply his model of human behavior to regulating government failures? Hard to ascertain, which is too bad, because his thinking here seems better adapted to what Kling calls the GMU view of economics: sure, markets fail, but let’s use markets.
For instance, Wilson writes:
Other rules cause honeybees to act as if guided by an invisible hand for other aspects of their lives, as recounted by Tom Seeley in The Wisdom of the Hive: The Social Physiology of Honeybee Colonies and for other social insects by Bert Holldobler and Ed Wilson in their bookThe Superorganism. Similarly, the cells within our bodies follow rules than enable us to be miracles of collective action. In both cases, the rules that contribute to the common good are a tiny fraction of the set of all possible rules. A worker honeybee could use a longer waiting time, the time of day, the amount of cloud cover, or innumerable other environmental stimuli as a cue to forage more. Those rules would not contribute to the common good. The reason that real foraging bees employ just the right rule, of course, is due to the winnowing action of natural selection, which discovers rules that work as needles among the haystack of rules that don’t work.
This is so basic, at least in retrospect, that it can’t be wrong, but it has profound consequences for the invisible hand metaphor in relation to human economies. The invisible hand is not axiomatically true. It is not the case that individuals following any rule automatically contribute to the common good.
Ahhh, yes, but do legislators automatically create rules that contribute to the common good? Among bees, the best rules emerge from a bottom up process of natural selection. As they do within single cells. So if we’re thinking about rule discovery, what is the best kind of system to filter out the bad from the good? Certainly not by top down rule imposition. Remember, there are no bee “regulators.” The knowledge to craft the best rules simply isn’t there. It has to emerge. Therefore I suggest Wilson would do well to look at his own work for the answer: a nested hierarchy of embedded evolutionary systems. A system of competing systems…and the best rules will emerge from a group level evolutionary process of discovery and emulation. In other words, Mr. Wilson, I’d like to introduce you to Paul Romer’s theory of history. Or what I call competitive governance.
Wilson comes very close to expressing this view in his discussion of Lin Ostrom’s work:
First, her work shows that human life is permeated with situations in which the invisible hand does not operate. Again and again, behaviors that are “for the good of the group” require forms of restraint and coordination that are highly tailored to the particular situation and are undermined by narrow self-interest. In other words, Lin’s work is centered upon the conflict between levels of selection and adaptation, as I describe for multilevel selection theory in the previous installment.
Second, people are capable of managing their own affairs only by virtue of a suite of psychological traits that cannot be collapsed into the narrow construct of self-regarding preference. Human psychology must be studied in all its complexity and evolutionary theory is required to understand human psychology.
Third, certain environmental conditions are required for people to manage their own affairs. Adaptations only work in the environments to which they are adapted and can spectacularly misfire in other environments. Lin’s work recognizes the importance of studying individuals and groups in relation to their environments, far more than contemporary economic theory.
Fourth, Lin’s work recognizes the importance of ongoing cultural evolution, rather than trying to derive everything from a conception of universal human psychology. Every group trying to manage its own affairs is an experiment in open-ended cultural evolution, with all the historicity and indeterminacy inherent in any evolutionary process. Different groups trying to solve the same problem will arrive at different solutions, none optimal, some better than others, and a few meltdowns. Groups will learn from other groups, resulting in cumulative cultural evolution, especially when environmental conditions facilitate the comparison of solutions across groups. The suite of psychological traits shared by all people creates the architecture for this kind of rapid adaptation to current environmental conditions.
To say rules are important is not to say top down regulation is. Regulations are a kind of rule, but given the assumptions Wilson makes, he should look for meta-rules that let the best rules emerge. In other words, competitive governance.
If People Could Vote With Their Feet…
There’s some new poll data from Gallup on trends in potential migration. Earlier data sets focused on whether people would like to emigrate–it turned out 700 million said yes. This latest batch focuses on which nations would have the largest net percentage increase in population, assuming the barriers to immigration were eliminated. All the usual caveats about surveys aside, I think it provides an interesting, if rough snapshot of how desirable it is to live in some places.
The Rise of the City State and the New Hanseatic League
Singapore, Courtesy of Foreign Policy
Parag Khanna has a fascinating think piece in the newest Foreign Policy. He says the age of nations is over:
The 21st century will not be dominated by America or China, Brazil or India, but by the city. In an age that appears increasingly unmanageable, cities rather than states are becoming the islands of governance on which the future world order will be built. This new world is not — and will not be — one global village, so much as a network of different ones…
Neither 19th-century balance-of-power politics nor 20th-century power blocs are useful in understanding this new world. Instead, we have to look back nearly a thousand years, to the medieval age in which cities such as Cairo and Hangzhou were the centers of global gravity, expanding their influence confidently outward in a borderless world. When Marco Polo set forth from Venice along the emergent Silk Road, he extolled the virtues not of empires, but of the cities that made them great. He admired the vineyards of Kashgar and the material abundance of Xi’an, and even foretold — correctly — that no one would believe his account of Chengdu’s merchant wealth. It’s worth remembering that only in Europe were the Middle Ages dark — they were the apogee of Arab, Muslim, and Chinese glory.
Read the whole thing, as Kling says. HT to Reason’s Hit and Run.
Newt Gingrich Proposes “Free Cities”
At the National Review, (and oddly, without mentioning Paul Romer) Gingrich rebrands Romer’s Charter Cities:
The U.S. should negotiate a series of bilateral treaties with receptive governments, carving out undeveloped sites the size of Hong Kong. Then a joint venture between the host government and the U.S. would launch brand new Free Cities in these places, with a complete set of American-style freedoms and responsibilities, guaranteed by treaty for 50 years.
Treaty-based Free Cities would entice and attract enterprising people and capital from around the world by offering: self-government; the rule of law; low taxes; reliable prosecution of corruption; freedom of faith, speech, and press; public registration of real property; a merit-based civil service; multi-ethnic meritocracy; zero tariffs; and an American university.
Free Cities would exemplify free-market globalization, rather than the economic exploitation of protectionist colonialism. They would generate millions of jobs where there are none today. And rather than opening another bottomless pit of statist foreign aid, these cities would be self-funding. A Free Cities development strategy would pay its own way by attracting funds from the private sector.
Hat tip to Karl Gallagher. That Newt has taken up the cause of competitive governance is tremendous news. Welcome aboard. I can’t help but raise a few quibbles, however, as Newt appears to insist on American-style this and American university that. If the U.S. can lead the way on the creation of Charter Cities in the poorer regions of the world…awesome. Dynamite. But the irony is that the U.S. itself doesn’t even offer the freedoms Gingrich calls American. One of Paul Romer’s tactics seems wise to me here. Whenever Romer raises the idea of multilateral agreements for establishing a Charter City, he mentions Canada as a party and not the U.S.. And with good reason. The U.S. has a long, shameless history of intervening in the affairs of puppet states. And given America’s own political constraints, I find it hard to believe the freedoms Gingrinch adumbrates will receive ensured protection. What happens when a Free City starts making autos in direct competition with General Motors? How long will that promise on zero tariffs last? I’ll take the under on 3 months.
[Update: Michael Strong has alerted me to the fact that Gingrich's coauthor, Ken Hagerty, proposed the Free City concept in the Weekly Standard, back in 2007.]
Please Vote For Me
I’ve been meaning to watch this documentary about an election for class monitor in a third grade class in the Evergreen Primary School in Wuhan, China. The preview offers a glimpse of the sordid underbelly of electoral politics–for example, I love how readily these eight year olds offer deals to buy votes. “Vote for me, I’ll make you Study Committee Officer.”
Mike Gibson
Jonathan Wilde
patrissimo
Guest Blogger
Will Chamberlain
flowidealism
Brad Taylor
