Let A Thousand Nations Bloom

Simon Kuznets is probably best known for his sophisticated statistical work on inequality and growth, as well as for the “Kuznets Curve”. Although famous for this technical work, Kuznets spends a great deal of his 1971 Nobel Prize acceptance lecture on the problem of institutions, even going so far as to use the phrases “social tools”, “social innovations,” and even “social technology.” His arguments are relevant to advocates of competitive governance.

Kuznets opens with a point that I’ve argued recently: technological growth requires social innovations if its fruits are to be fully and equitably enjoyed:

Advancing technology is the permissive source of economic growth, but it is only a potential, a necessary condition, in itself not sufficient. If technology is to be employed efficiently and widely, and, indeed, if its own progress is to be stimulated by such use, institutional and ideological adjustments must be made to effect the proper use of innovations generated by the advancing stock of human knowledge.

Kuznets was also well-aware of the political dimensions that restrained (and still restrain) the majority of the world’s population from the growth modern technology is capable of.

…the spread of modern economic growth, despite its worldwide partial effects, is limited in that the economic performance in countries accounting for three-quarters of world population still falls far short of the minimum levels feasible with the potential of modern technology.

…the difficulty of making the institutional and ideological transformations needed to convert the new large potential of modern technology into economic growth in the relatively short period since the late eighteenth century limited the spread of the system. Moreover, obstacles to such transformation were, and still are being, imposed on the less developed regions by the policies of the developed countries.

A century of foreign aid and large-scale ‘development’ projects has not brought prosperity to the developing world, and has likely even enshrined violent, slow-growth institutions. Kuznets suggests that developing nations can “stimulate growth and structural change” by their ability to “refer, select, or discard, legal and institutional innovations that are proposed in the attempt to organize and channel effectively the new production potentialities [of technology].”

This is exactly the method used by innovative projects like the Dubai International Financial Center — a wildly successful 110-acre island of British common law in a sea of UAE Sharia Law. Countries like China and India have already begun experimenting with free-trade zones and Honduras has recently started a project for special reform zones. Here are Kuznet’s nations, picking and choosing institutional innovations to channel “new production potentialities.”

Kuznets seems to accept (forty years before it was written) Paul Romer’s framing of institutions and rules as open to innovation when he argues that his “conclusions [about physical technology] apply pari passu to innovations in legal forms, in institutional structure, and even in ideology.”

Kuznets sounds like an optimist, but one that realizes that innovation is an uncertain business. The possibilities that come with change — as innovations filter through a global system — can be tremendous:

A technological innovation, particularly one based on a recent major invention, represents a venture into the partly unknown, something not fully known until the mass spread of the innovation reveals the full range of direct and related effects. … Its cumulative effects, all new, extend over a long period and result in an enormous transformation of economic production and of production relations. But these new effects can hardly be fully anticipated or properly evaluated in advance (and sometimes not even post facto).

Even when the technological innovation is an adaptation of a known technique by a follower country, the results may not be fully foreseeable, for they represent the combination of something known, the technology, with something new, an institutional and ideological framework with which it has not previously been combined.

An invention or innovation may prove far more productive, and induce a far wider mass application and many more cumulative improvements than were dreamed of by the inventor and the pioneer group of entrepreneurs. Or the mass application of a major invention may produce unexpected dis-economies of a scale that could hardly be foreseen in the early phases of its diffusion.

Examples of both positive and negative surprises abound. Many Schumpeterian entrepreneurs failed to grasp, by a wide margin, the full scope and significance of the innovations that they were promoting and that eventually brought them fame and fortune. And most of us can point at the unexpected negative effects of some technological or social invention that first appeared to be an unlimited blessing.

So Kuznets counsels skepticism of those claiming to know too much about the outcomes of these innovations:

The significant aspect here is that the surprises cannot be viewed as accidents: they are inherent in the process of technological (and social) innovation in that it contains an element of the unknown. Furthermore, the diffusion of a major innovation is a long and complicated sequence that cannot be accurately forecast, with an initial economic effect that may generate responses in other processes.

This uncertainty requires dynamism, it:

demands a stable, but flexible, political and social framework, capable of accommodating rapid structural change and resolving the conflicts that it generates, while encouraging the growth-promoting groups in society. Such a framework is not easily or rapidly attained, as evidenced by the long struggles toward it even in some of the presently developed countries in the nineteenth and early twentieth centuries.

Complexity theorist Nassim Taleb (author of The Black Swan) calls this ability to cope with turbulence, ‘anti-fragility’. This is precisely the kind of resilience, responsiveness, and ‘turbulence-calming’ that radical decentralization and competitive governance offers. But it’s not as easy as just importing the social technologies of developed countries to other regions:

nor is the social technology that evolved in the developed countries likely to provide models of institutions or arrangements suitable to the diverse institutional and population-size backgrounds of many less developed countries … These comments should not be interpreted as denying the value of many transferable parts of modern technology; they are merely intended to stress the possible shortage of material and social tools specifically fitted to the different needs of the less developed countries.

Kuznets concludes his talk with words of warning for the future.

…a substantial economic advance in the less developed countries may require modifications in the available stock of material technology, and probably even greater innovations in political and social structure. It will not be a matter of merely borrowing existing tools, material and social; or of directly applying past patterns of growth, merely allowing for the difference in parameters.

The guiding principle of this innovating is experimentation, and will necessarily be context-dependent:

It seems highly probable that a long period of experimentation and struggle toward a viable political framework compatible with adequate economic growth lies ahead for most less developed countries of today; and this process will become more intensive and acute as the perceived gap widens between what has been attained and what is attainable with modern economic growth. While an economist can argue that some aspects of growth must be present because they are indispensable components (i.e. industrialization, large scale of production, etc.), even their parameters are bound to be variable; and many specific characteristics will be so dependent upon the outcome of the social and political innovations that extrapolation from the past is extremely hazardous.

What we cannot simply learn from the past, we have to reach for in an experimental future.

Police Evict Traders from Muthurwa Market, Kenya

Globe-trotting journalist Robert Neuwirth has an astounding presentation at Poptech on the ‘informal sector’ around the world. It turns out that, in less than 10 years, 2/3rds of the world’s population will be working ‘off-the-books’, in some kind of informal trade like hawking DVD’s in an alleyway or selling bottled water to passing cars. His book, Stealth of Nations, is highly recommended and is an absolutely riveting read.

Although I believe Neuwirth makes a false conflation between corporatist Western economies and a ‘free market’, he makes excellent concluding points about how our current institutions blind us to the possibilities of social organization.

“All the definitions of our economic system are developed by the people in power,” Neuwirth says, channeling philosopher (and methodological anarchist) Paul Feyerabend.

Neuwirth argues that the informal economy offers a glimpse into a vibrant future unbounded by today’s methods of political order. People work in cooperatives, they barter, they swap using their own evolved currencies. They bring themselves electricity, trash collection, public transportation, welfare for the destitute and sick, even law and order. These markets are messy and not necessarily ‘rational’ from the perspective of an outsider or a State. But the tumultuous process is growing by leaps and bounds, spilling over international borders, and giving livelihoods to masses.

Yet they are off the map. They are not recognized by Nation-States and, tragically, they are often victims of predatory political forces at home and abroad.

By pointing out this absurdity, Neuwirth is reaching something truly fundamental. He has charted the limits of our reigning ‘social technology’ — the Nation-State system.

Today, only elites have the power to build large scale rule-creating institutions, to access modern networks of dispute resolution and arbitration, and to operate under good commercial law. We can see what this has done by looking at the informal sector: elites have shaped the rules and institutions to their benefit and marginalized the majority of humanity in the process.

The displacement, the invisibility that Neuwirth sees of half the world working outside ‘the System’ is a symptom of how the Nation-State has congealed into an outdated, unjust monopoly. Formal businesses, especially crony-capitalists in more corrupt States, enjoy the force of the Nation-State and its perceived legitimacy. Informal entrepreneurs — which is to say a growing majority of mankind — do not.

When we call for ’empowerment’ of the poor, we should not just be calling for a broader recognition of the poor’s dignity and hard work. Nor should we just be calling to integrate marginalized groups into currently existing institutions. We should be calling for the tangible, practical, progressive movement towards democratizing access to rule-creating institutions themselves: bringing good commercial law and methods of dispute resolution to as many people as possible.

We should open this institutional toolkit to entrepreneurship and devolve political power to as low a level as possible. We should clear the field to allow a thousand nations to bloom, and we should recognize the legitimacy of the voluntary, community institutions and services that already govern billions in the informal sector.

Informal entrepreneurs have proven their ingenuity and their resilience in building parallel institutions to govern themselves and overcome their problems despite their disenfranchised position in the world.

By allowing bright minds now laboring in the obscurity of the informal sector to build entrepreneurial communities, to grow their own methods of governing themselves, we can reach beyond the exclusive and unjust Nation-State and into the vibrant world Neuwirth envisions. We can erode the power of elites, break through archaic definitions of the economy, unleash economic growth, and invite a 21st century of true connectedness that transcends the artificial (and tragic) lines of the Nation-State system.

In the Economist:

TRUJILLO is a sleepy backwater, but one with a lot of history. The beautiful bay surrounded by lagoons and mountains on the northern coast of Honduras was where Christopher Columbus set foot on the American continent during his fourth voyage in 1502. But in a few decades, it might be known for something entirely different: being the Hong Kong of the West. Scores of skyscrapers and millions of people could one day surround the natural harbour. The new city could dominate Honduras, today one of the poorest and most crime-ridden countries in Central America, becoming a magnet for most of the region’s migrants.

The prospect may sound fantastic, but this is the goal of an ambitious development project that Honduras is about to embark upon. In a nutshell, the Honduran government wants to create what amounts to internal start-ups—quasi-independent city-states that begin with a clean slate and are then overseen by outside experts. They will have their own government, write their own laws, manage their own currency and, eventually, hold their own elections.

But at the zoo, I guess he has voice:

BAHAWALPUR: In a bizarre turn of events, Monday saw the capture of a cross-border trespasser – a monkey, found wandering in Cholistan, all the way from India…The monkey was later placed at the Bahawalpur zoo, said Mohammad Iqbal, who is now his caretaker. According to reports, the newest resident of the zoo has been named Bobby.

• Ashwin, as is his wont, elucidates the mechanisms of crony capitalism at Macroeconomic Resilience: “The cause of the investment deficit is an increasingly financialised, cronyist, demosclerotic system where incumbent corporates do not face competitive pressure to engage in risky exploratory investment…Investments in process innovation require the presence of price competition within the industry. Investments in exploratory product innovation require not only competition amongst incumbent firms but competition from a constant and robust stream of new entrants into the industry.”
• Alex Tabarrok on his new ebook (it’s short and good), Mancur Olson, demosclerosis, Paul Romer and the higher ed bubble.
• “Competition is merely the absence of oppression.” The corollary is that competition in governance with a constant and robust stream of new entrants will decrease oppression.

This strange philosophy is beginning to dawn on some all star commentators on the left.  It used to be that in the case of a fire, you should make your way for the exits in the front and rear of the auditorium. But now some are beginning to question the incentives of that sage philosophy of the multiplex.  Now they fear–who will fight the fire if everyone leaves the building? Ahhhh, we must lock the doors! That will encourage everyone to stay and save the theater….

In an article entitled “What Can Save the Euro” Nobel Prize winning economist Joseph Stiglitz writes:

Moreover, free labor mobility means that individuals can choose whether to pay their parents’ debts: young Irish can simply escape repaying the foolish bank-bailout obligations assumed by their government by leaving the country. Of course, migration is supposed to be good, as it reallocates labor to where its return is highest. But this kind of migration actually undermines productivity.

Which means, what, we should ban migration? If my actual brother takes out loans he can’t repay, I’m not on the hook. But if a whole flapjack generation piles on the debt, then I am responsible? What’s the moral logic there?

And then we have the usually dashing Michael Lewis, who whines in a satirical put on:

As a first, small step we propose to bestow, annually, an award to the Upper One who has best exhibited to the wider population his willingness and ability to have nothing at all to do with them. As the recipient of the first Incline Award — so named for the residents of Incline Village, Nevada, many of whom have bravely fled California state taxes — we propose Jeff Bezos.

His private rocket ship may have exploded before it reached outer space. But before it did, it sent back to Earth the message we hope to convey:

We’re outta here!

The author of Boomerang and the Big Short should know that the fiscal dynamite sitting under an insolvent Greece and California was not put there by people who left the country and state. He’s confusing effects with causes. People left because they saw the troubles ahead. They’d only be idiots to stick around.

The company got a big jolt last week when Peter Thiel, co-founder of the online payment service PayPal, announced he would invest in the project and lead the company’s search for funding. Thiel has been a strong proponent for other “seasteading” projects that aim to create autonomous ocean communities.

“Tech innovation drives economic growth, and we need more of both,” Thiel said in a statement. “Many innovative people have a really hard time getting visas, and Blueseed will help bring more innovation to California with a solution that is itself as innovative as it is clever.”

Story here. The left-wing American Center for Progress is somewhat positive:

 “If this doesn’t sound the alarms to policymakers that we need to revamp our immigration policies, nothing will.”

Ahhh, the power of jurisdictional arbitrage to change policy. I see you are progressing. But I wouldn’t worry about USG acting on your “alarm” anytime soon:

The House of Representatives on Tuesday passed a bill that ends the practice of giving out the same number of visas for high-skilled immigrants to all countries. That will make it easier for engineers and technology experts from India and China, who are aggressively pursued by U.S. companies, to enter the U.S.

The bill does not increase the total number of those visas — about 140,000 a year — and has been blocked in the Senate by Sen. Chuck Grassley, R-Iowa, despite receiving bipartisan support in the House. Grassley worried that the bill does nothing to “better protect Americans at home who seek high-skilled jobs during this time of record high unemployment.”

Remember that about half of those 140,000 visas go to the spouses and children of the main applicants. So the number of the highly skilled is much lower than the official quota suggests. Blueseed ahoy!

Ground-breaking economist, mathematician, and complexity theorist W. Brian Arthur has a fascinating presentation on the revolutionary ‘intelligenation’ of the economy at PARC, a research and development center. In addition to laying out his compelling theory of technological evolution (too much to discuss here, but found in his talk and in his excellent book The Nature of Technology), Arthur concludes his remarks with a sobering reminder: as the pace of technological innovation increases, humanity faces the serious dilemma of governing a powerful, ever-growing and ever more complexly connected world.

He argues that the challenge facing human economies today is not productivity, but access. Arthur is not making a crude egalitarian argument: the disparity of access to the fruits of productive economies is not a problem of technological processes or factories. It’s a problem of access to the institutions that harness the power of modern production.

Arthur offers an admirable definition of economics. He considers the standard notion that economics is about ‘markets allocating goods under conditions of scarcity’ far too limiting. Instead, “the economy is how we organize ourselves to meet our needs.” This expanded view of the economy and its study should hearten advocates of competitive governance, as governing institutions clearly are a method of organizing to meet our needs.

Governance can no longer be treated as ‘given’, as outside models and analysis. Indeed, the nation-state fades from its sacrosanct position as the ultimate tool for social organization, and becomes merely one possible ‘social technology’: as open to innovation and evolution as iPods or XBoxes.

Arthur’s warning and his expanded definition of the economy converge: our world is advancing, but with an institutional ball-and-chain attached.

Everyone should be concerned that the power of technology be used for good, and that it be kept out of the hands of those who would use it for oppression and exploitation. This requires building networks of potent checks and balances on predatory elites around the world. In a word, it requires competition, to erode unjust power and incentives towards violence.

Specifically, the humanitarian concerned with worldwide inequality should look aghast at the prospect that much of humanity could miss out on an impending future of rapid innovation, all because they’re trapped using bad social technologies. The technological advance is almost inevitable but, as Arthur implicitly warns, we must have our institutional house in order so that we may bring a cleaner, richer, more peaceful, and more meaningful world to everyone on Earth.

This demands decentralized experimentation: a worldwide industry of innovative, entrepreneurial, ‘Start-Up nations.’

Shikha Dalmia has an excellent new op-ed discussing the possibilities of bringing Charter Cities to American soil.

Bloomberg recently ran a piece on Detroit, which is rapidly becoming an unmitigated disaster of special-interest capture and decaying public services. The severity of Detroit’s bad governance is shocking:

Its population fell 25 percent to 714,000 since 2000, according to 2010 U.S. Census data that suggest tens of thousands moved to suburbs. Nearly half of Detroit’s adults, roughly 200,000, are functionally illiterate, according to the National Institute for Literacy.

It serves as a strong case-study in the power of ‘exit’ away from bad institutions. Even with the relatively narrow choice in governance between American cities, people are still willing to leave en masse when things get bad enough.

It’s also worth noting that the Free Cities model, where compensation for authorities is tied to city growth rates or a city is held privately with citizens as shareholders, this decline would be felt early on. Watching a Citizen’s Dividend shrivel or an official’s salary fall from the deadweight losses of special-interest lobbying breeds reform early, thorough, and fast.

Good overview:

Linguists quip that a dialect is a language without an army and a navy to enforce its status. Theologians likewise say that a cult is simply a church that lacks political clout. Seasteads may end up as wannabe sovereign states without the means to defend their autonomy against land-based governments. The first ones to overcome the many technical challenges, raise the money to construct their vessels and set out for the open seas will be quite dependent on terrestrial authorities’ goodwill. But countries short of available land, or whose leaders are struggling to pass liberalising reforms against resistance from vested interests, may tolerate limited experiments in low-tax, rule-free self-government. So the seasteaders may be in with a chance.