How Do You Become the Richest Woman in China?
I highly recommend the very lucid and insightful Solomon’s Knot: How Law Can End the Poverty of Nations by Robert Cooter and Hans-Bernd Schafer. It nicely details the micro-foundations for economic growth:
Shang Yin, the eldest of a soldier’s eight children, opened a printing shop in the 1980s when she was in her twenties. As China moved to a market economy, demand swelled for printed products used by new industries. A short supply of paper bottlenecked Shang Yin’s business, until she made the discovery of her life: ships left Chinese harbors for the United States filled with cargo, and they returned almost empty…Shang Yin had discovered a new market, and she reorganized her business to exploit this opportunity. She started buying scrap paper in the United States and shipping it back to China. Business burgeoned at her company Nine Dragons Paper Industries, and some observers now count her as China’s richest woman.
When a developing country has many entrepreneurs like Shang Yin, a cascade of innovations in markets and organizations lifts productivity, wages and profits. Innovations in markets and organizations combine ideas and capital in bold ventures with big risk and opportunities. The central claim of this book is that sustained growth in developing countries occurs through innovations in markets and organizations by entrepreneurs; developing innovations poses a problem of trust between innovators with ideas and investors with capital (the “double trust dilemma”); and the best solutions require law.
Emphasis mine. Though much of the book is about how bad laws inhibit prosperity in poor countries, much of its analysis applies equally well to richer European and North American economies.
Francis Fukuyama asks, What is Governance?
He even has the courage to doubt that democracy is always the best:
We Americans tend to believe that democracy is an intrinsic part of good governance and that more democracy means better quality government…However, this postulated relationship remains just a theory that remains subject to more empirical testing. One can think of many ways in which greater democratic participation actually weakens the quality of governance. One case happened in the United States when Andrew Jackson was elected president in 1828, as a result of the broadening of the franchise in many states in that period. Jackson argued (1) that since his party won the election, he should get to appoint federal officials; and (2) that there was no job in the US government that was so difficult that any ordinary American couldn’t do it. This was the beginning of the patronage system in the US, in which the federal bureaucracy was controlled by the two political parties and in which jobs turned over with every election cycle.
Of all the problems democracy generates, this piece of history is small beer, but it’s a start for thinking through some of the obstacles to good governance. It is true: relying on patronage systems instead of performance based metrics worsens rent seeking. Nevertheless, Fukyama is trapped in the academic political philosophy fly bottle–namely, his attention is drawn to the question of who should rule. He concludes we should trust the council of the Ivy League Jedi:
I would argue that the quality of governance in the US tends to be low precisely because of a continuing tradition of Jacksonian populism. Americans with their democratic roots generally do not trust elite bureaucrats to the extent that the French, Germans, British, or Japanese have in years past.
It’s baffling that he’d point to European countries that are one step from cascading into Michael Bay explosions detonated by a flurry of defaults. And elderly Japan’s back may soon break under a debt to GDP ratio greater than 220 percent. Any old how, the better question he should ask is: what system of governance discovers error quickly and roots it out effectively? The answer begins with the exit/voice paradigm, which implies a trial and error discovery process. Fukuyama is too focused on top down, hierarchical feedback loops. These are important–look at corporate governance–but alone, they are not optimal. Call them citizens, call them customers, they also can join the effort from the bottom up either by voting the bums out, yes, or by simply leaving for something better by their lights. Good governance is not an absolute institution independent of the wider ecosystem of competing governance structures. This is like asking “what is good corporate governance” independently of asking whether there’s a competitive market.
“Who Will Guard the Guardians?”: Restraining Sovereign Power Using Entrepreneurial Communities
Quis custodiet ipsos custodes?
Economist Barry Weingast writes, “the fundamental political dilemma of an economic system is this: A government strong enough to protect property rights and enforce contracts is also strong enough to confiscate the wealth of its citizens.”
How then do we restrain the predatory powers of government to an appropriate scope? How do we keep powerful interests from capturing government institutions to use against others? In other words, “Who will guard the guardians?”
Weingast has an easy answer:
The answer concerns the design of political institutions that credibly commit the state to preserving markets, that is, to limits on the future political discretion with respect to the economy that are in the interests of political officials to observe.
The romance surrounding America’s founding and the drafting of the Constitution is the story of this struggle. Unfortunately, actually ‘designing’ these institutions is exceedingly hard. And even if we were able, people disagree over the ideal size of government.
Disagreement over the ideal size and scope of government means any given ‘transgression’ that expands State power by exploiting the populace is not necessarily opposed by enough people to stop the expansion.
Weingast shows rigorously, using history and game theory, that sovereigns can ‘divide and conquer’ their subjects using disagreement over government’s limits:
…if citizen beliefs about the appropriate limits on the state differ considerably, it is difficult for them to react in concert to state actions. Indeed, this diversity allows the sovereign to form a coalition with one group of citizens against another, allowing the sovereign to transgress boundaries considered fundamental by other citizens.
Obviously, most Nation-States, including the US, contain severe disagreement over government’s proper scope. Unfortunately for us, the sovereign can later transgress against the same group that they used earlier for the winning coalition to transgress against another groups. The sovereign wins regardless.
Without an “automatic mechanism” (Weingast’s term) to produce a consensus on the limits of State power, we face the worst possible outcome: where sovereign power steadily balloons using a divide-and-conquer strategy against all groups, in theory indefinitely.
So what can we do?
We need to find a way to unify preferences about government’s limits. With a unified ideology, a transgression is opposed by a broad base of people and becomes politically untenable. Divide and conquer fails.
But actually convincing 300,000,000 of your fellow citizens that your idea of government’s limits is the correct one is an almost impossible task. As anyone who has tried to rally people behind a cause will attest, political activism is difficult and the results are often disappointing.
Moreover, as I have argued here previously, the expansion of government itself changes people’s perception of acceptable government limits and sovereign power expansion may even create the psychological environment that reinforces the legitimacy of future transgressions.
So we must search for Weingast’s ‘automatic mechanism’ so that our convergent preferences for limits to government bring a resilient political order by stopping attempted transgressions in their tracks.
Imagine a world in which people are opting into a wide variety of different institutional structures. People personally contract into competitive legal systems and different mixtures of ‘public goods’ and social programs provided by sovereign, small jurisdictions or private developers.
This is a world of entrepreneurial communities and competitive governance. In the act of contracting and immigrating, we find people revealing their preferences for a rule set and, by extension, a pre-defined scope for government activity.
People vote with their feet and their pen for an explicitly stated limit on ‘government power’, as expressed by contracting into an entrepreneurial community. This means that competitive governance is an automatic mechanism for bringing together people with convergent ideologies and expectations about an authority’s limits.
If Weingast’s analysis is correct, this means that not only will people enjoy the benefits of living beneath institutions more closely tailored to their preferences, but the attractiveness of a competing polity to a citizen will work to restrain unjust expansion in an authority’s power.
This is because those attracted to a particular rule system will have similar ideas about the limits of that rule system, creating a robust check against the ‘divide and conquer’ strategy of a sovereign.
Those that hope for ‘limited government’ should reconsider their acceptance of the Nation-State system for achieving their goals. Nation-State machinery is too easily used by political elites and economic special-interests against the large, dispersed mass of people with heterogeneous ideas about government’s limit. Those frustrated with the political process in countries like America must realize that ‘divide and conquer’ is endemic to the system.
To limit government, we need to bring together people’s preferences for government’s limits. Since that’s nearly impossible, we need to bring the people with convergent preferences together. With competitive governance attracting citizens by innovating rules and political institutions, we build a robust check against predatory government expansion. In short, limiting government power needs entrepreneurial communities.
Wanted: Advisors for Innovative Legal System
As you may have read here or elsewhere, I’m CEO of a startup called Future Cities Development, whose mission is to establish innovative new cities that provide choice, prosperity and greater quality of life. We work in partnership with host countries that want to create economic opportunity for their people, and you’ll be hearing lots more about us later this year as our first development progresses.
A key part of our approach (articulated well by the Free Cities Institute) is to work with the host country to carve out areas of law previously handled nationally, to instead be defined at the city level. This gives citizens greater choice in jurisdictions without leaving their country, and enables competition between cities to attract residents and businesses. So part of our core value offering is to develop a world-class legal system based on historical study and best practices around the world, which can operate inside the constitutional limits and existing legal environment of the host country.
We are working to develop this system, and so we’re beginning to form a board of advisors for it. If you know someone with time & expertise in this area, please pass this along. If you’re interested, you need to know:
- We’re looking for people with relevant professional expertise or very strong, long-term interest in this area.
- You will have to sign an NDA.
- We are not currently compensating advisors, although it is a possibility for the future.
- We aren’t expecting very many hours, and will be flexible.
- The initial relationship will be informal; after a trial period with demonstrated contribution, we’re open to being listed on your resume or linkedin.
- Most importantly: You’ll be contributing to fascinating work that is a key enabler of increasing competition in governance and radically improving one of the most foundational, yet non-innovative, areas of human life.
If you’re interested, please email patri@futurecitiesdev.com with:
- CV, resume, LinkedIn, or short summary of qualifications.
- The most relevant piece you’ve written (link or attachment to article, blog post, book, paper, etc.)
- 100 words or less on what you see as the greatest challenge in practice to designing a legal system in this context.
Your Friendly Local Customer Service Representative… Your Judge
More interesting news from Dubai about the opening up of their common-law courts in the Dubai International Financial Center free zone to small businesses elsewhere.
The registrar sounds excited:
This is the first time these companies have had an English-language, dispute-resolution option available to them in Dubai.
And so do the small businesses (since disputes are usually settled in only three weeks, without any lawyers or legal fees):
Judging from the hundreds of inquiries received by the DIFC Courts since October, we are forecasting a … 100 per cent increase in the SCT’s caseload in the year ahead.
However the truly fascinating quote is an off-the-cuff remark early in the interview:
It was nice to finish the year having tested the new jurisdiction and so send a clear message to the business community that we are here and ready to resolve problems with a continued commitment to customer and community service.
When was the last time you thought of a court as having a ‘commitment to customer service’?
Free Cities Conference in Belize
Register here:
The founders of the Free Cities Institute, in association with Universidad Francisco Marroquín in Guatemala, will discuss recent efforts to establish Free Cities in Honduras and other countries. They will also present a specific course of action for creating the first Free City in Belize.
Date: Thursday, January 26, 2012
Time: 6:00 p.m.
Place: Radisson Fort George Hotel and Marina in Belize City, Belize
Cost: US$50 per person
A City Is a Start Up, Except When It Isn’t
Writing in Tech Crunch, Jon Bischke draws the analogy:
…it seems to follow that if “a city is a startup,” then the best mayors are the ones who are looking at their cities in much the same way as entrepreneurs look at the companies they have founded. The ingredients for a successful startup and a successful city are remarkably similar. You need to build stuff that people want. You need to attract quality talent. You have to have enough capital to get your fledgling ideas to a point of sustainability. And you need to create a world-class culture that not only attracts the best possible people, but encourages them to stick around even when things aren’t going so great.
The tone of the article is positive, and it’s interesting to think about ways city governments can encourage small business creation, but if Bischke is going to make comparisons, then he should make accurate comparisons. While Bloomberg may seem like King of New York, the incentives he faces as a ruler are very different from those of a firm’s founding team. For one, he has no ownership stake, and, therefore, less energy and commitment to his endeavor’s success than the typical start up founder. It is true that, roughly speaking, both founders and mayors “need to build stuff people want.” But the historical track record shows that mayors are very poor at customer need discovery. They can launch products no one buys or likes, coerce non-users into paying for them, and still get reelected to boot. Think about Marion Barry, Kwame Kilpatrick, and John Lindsay, for starters. Now Bloomberg will have three terms, which is surprising for a Republican in NYC, and he appears to care about the long term viability of the city’s economic dominance. The partnership struck with Cornell and the Israel Institute of Technology might help diversify the sectors of the city’s economy, but it’s also important to know that these “investments” aren’t paid for entirely with private capital, but instead with other people’s money and donations. The upside could be nice for some number of the city’s residents (their economic projections are very rosy), but, ahem, the downside is socialized–again a very different set of circumstances from those facing a start up’s team.
In Defense of Urban Life
People are flocking to burgeoning cities like Lagos, Nigeria
A recent article of mine was criticized with the following:
I can barely believe how idiotic that statement is. City dwellers ecologoical footprint is generally more 10 times that of naturally living humans. The broad scale monoculture required to feed cities is massively destructive to the environment and vastly less inefficient than permaculture food forests.
Most city dwellers are completely incapable of long term survival in a wilderness. Is someone with a college degree who can’t keep themselves alive really more intelligent than a naked bushman?
As for wealth I’d have to go with the old adage ‘He is richest whose pleasures are cheapest’. Economic growth is a mostly a lie when you take into consideration the environmental degradation it causes. We have more extreme poverty and a far greater disparity between the rich and the poor than ever. Cities make a tiny minority super wealthy, many comfortable and leave billions in the third world starving. But thats okay because they’re hidden from view: Out of sight, out of mind.
The person who wrote that article should try travelling around Africa and Asia on the roads less travelled and see how most of the world really lives.
I encourage the poster to have a look at the original article as well as Glaeser’s book. In fact, the efficiencies created by cities lower ecological footprints, especially our carbon footprint, since people can bike, take public transit, and drive far less. Ed Glaeser’s work shows this with strong empirical evidence. If we care for the environment, we should head to cities, which we can build up instead of out and return vast tracts of forest back to nature instead of bulldozing them to build suburia.
I am strongly in favor of innovative ideas that lower the ‘monoculture’ footprint of cities like small-scale urban farming, which has already had some success near my home in Brooklyn. Window boxes for vegetables and rooftop gardens are all possibilities. One of the biggest barriers to bringing these ideas to full bloom are draconian zoning/licensing/building code restrictions. We need to give the entrepreneurs looking to make urban life more ecologically sustainable the ability to take action.
On a larger scale, this blog has covered ideas like progressive environmental trusts and dividend systems for the upkeep of natural parks and the restoration of those already damaged.
The skills needed to live in a city are different than those needed to live an isolated life in the wilderness. But why is one set better than another? Glaeser doesn’t assert that being an accountant is ‘superior’ to being a farmer. He’s talking about economic efficiencies of having people with many different skills and ideas nearby you. Even the Amish draw upon their neighbors to raise a barn.
Obviously economic growth is not everything, but it is a powerful enabling condition to allow people to achieve the kinds of higher pleasures that they truly want. People don’t want ‘a better clothes dryer’, they want to be able to spend less time washing clothes and thus more time writing novels or playing with their children or fishing or what have you.
Before condemning others for ‘not knowing about life among the poor’, you should consider how your argument against economic growth would sound to someone who lives in a low or no-growth economy in the developing world. You are effectively saying, “I do not care what you want, circumscribe your ambitions and accept ‘simple pleasures’ because economic growth isn’t everything.” I think you would find most of the world’s poor wants economic growth and the opportunities that it offers.
In fact, cities are currently the engines of economic growth and increasing prosperity in the developing world, especially because of their large informal sectors that employ the majority of the world’s poor. If it’s true that they only work for elite minorities, why is there such a massive exodus in the developing world to cities? People are voting with their feet against rural poverty and for the possibilities of urban life. We should respect these decisions, they are expressions of the poor’s autonomy.
As far as the personal dig, I have traveled in Africa though I admit not extensively. My own experience suggests that it is unclear that people in urban areas are worse off than subsistence farmers (or ‘naked businessmen’ as you say). Rural areas are more prone to famine and other shocks to the economy because they are isolated from trade networks.
Urban life brings people together for mutual aid, and it opens wealth-generating possibilities for specialization and trade. It can integrate otherwise contentious groups, and it melds culture together to bring about beautiful new hybrids of music and art. We shouldn’t write off cities because of a romanticized ideal of the pastoral.
Seeds of Competitive Law in Dubai?
The Dubai International Financial Center (DIFC) is a small zone of credibly-administered common law within the UAE’s Sharia law system. Recently, Dubai opened up the courts to a broader client-base. While previously the courts served the institutions housed within the zone, now businesses outside its narrow bounds can bring in their contracts for arbitration.
It appears to have been a smart move:
Dubai’s move to open up its common-law court has sparked a flurry of contract changes among foreign firms to ensure future disputes will be aired at court, the registrar has said.
DIFC Courts, located in the city’s tax-free financial zone, expects to double the amount of cases heard at its small claims tribunal this year and is doubling its staff in anticipation of the surge.
“Without exception I have received calls from every major law firm that has offices in Dubai and the majority of middle-tier international law firms because their clients want to understand how they can use the DIFC Courts,” said registrar Mark Beer.
This is an early step towards allowing better choice in law, and innovating law itself through competition. With parallel legal ‘operating systems’ people can vote with their feet (or, well, their pen) by finding mutually beneficial systems for dispute resolution.
Proving that institutions and credible legal systems matter for markets, the move is openly motivated by a desire for economic growth:
The Dubai government in October widened the court’s jurisdiction to allow companies based outside the tax-free business park to bring their cases before the common law court in a move aimed at attracting more international investment to the emirate.
Under the new rules, companies can opt to resolve their disputes in DIFC Courts if both parties agree to its jurisdiction. Contracts can also include a clause binding both parties to use the court in the event of a disagreement.
“This move will reinforce Dubai’s reputation as the business hub of the region, and attract business to invest in Dubai that may otherwise have established elsewhere,” Michael Hwang, chief justice of the DIFC Courts, told Arabian Business in October.
The Brookings Institution on City-Scale Development
Bruce Katz at The Brookings Institution has an excellent new piece on the ‘metropolitan development’ model:
This is a tantalising prospect: the emergence of a modern Hanseatic League, where cities and metropolitan areas form trading relations directly with their global counterparts, bypassing national governments
Highly recommended.
Let A Thousand Nations Bloom 