Knowledge Problems and Free Zones
Indian export promotion policies did not fail because of bad design or implementation. Indian export promotion policies failed because of the knowledge problems associated with a government planning agency determining where to locate a zone, what industries to promote within a zone and which firms to allow in the zone. They failed because the Indian government pursued a top down export promotion strategy rather than a bottom up strategy.
The consequences of ignoring the knowledge problem continue to add to the wastage of resources that can be better spent elsewhere. For example, zone bureaucrats spend considerable time and effort in attempting to select the “best” developers and entrepreneurs for their zones. Moreover, zone developers expend considerable resources developing infrastructure to promote the development of regions that might not be the best place to produce for industries that might be the best industries to promote in that region.
Due to the knowledge problem, any policy that is geared towards developing a region is bound to fail (or to be unnecessary). Regions and clusters develop due to several factors in the local economy which cannot be engineered by a central planner. Thus efforts to engineer clusters will continue to be frustrated as is demonstrated by recent efforts in India. Although India’s new zone policy intended to move business operations out of existing big cities, for instance, most of the zone-based business successes have been within existing cities. This is a clear indicator that the clusters that emerged spontaneously offer powerful incentives to entrepreneurs rather than newly government-created areas.
There are lessons here for competitive government more generally. Expecting to use existing governments to create enclaves of good governance is foolish. If governments could do that competently, they’d likely be able to do other things competently as well, and we wouldn’t need free zones at all. The problems of central planning apply to the creation of governance mechanisms as well as their operation. We need the small scale experimentation and ex post selection of competition in order to learn what works. That’s true of export processing zones deciding where to locate, what industries to promote, and which firms to admit. It’s also true of free zones, charter cities, and seasteads choosing a bundle of rules.
That’s what makes Michael Strong’s preferred approach of using private enterprise to found new cities so attractive compared to other approaches. Free zones don’t need to be creatures of the state, but merely accepted by them. That “merely” hides some pretty serious challenges, of course, but we have seen a large number of private, entrepreneurial free zones cropping up all over the place. According to this World Bank report, 62% of free zones in poor countries are privately developed and operated. As the knowledge problem argument would indicate, private zones seem to perform much better.
While entrepreneurial free zones are awesome, the fact that they need to deal with entrenched interests in existing states limits the possibilities. This is why I think seasteading is even more awesome: it allows for the creation of entrepreneurial communities without the need to deal with existing states at all.
The End of Director’s Law?
Many have long believed that big government helps the poor at the expense of the wealthy. But back in the glory days of economics at the University of Chicago Aaron Director noticed a recurring theme in the way democracies cut the pie. Given the power to tax and redistribute, you might expect those on the bottom (plus one to gain a majority) would form a coalition to snatch away the wealth of the top 49 percent. But this doesn’t happen. Director teased out why: forming a winning coalition requires intelligence, effort, organization, endurance, resources, indignation…capabilities the poor simply do not have. This is part of the reason why they’re poor, after all. For the very same reasons they struggle in a free market, they fail in the political market too. By Director’s logic and contrary to popular belief, the big jackpot winners in democracy are the members of the motivated middle class. They take from the rich and the poor. (Here’s George Stigler’s paper on Director’s Law.)
Today Eric Falkenstein says the middle class is no longer the dominant coalition in the U.S.. Instead, we have a bar bell coalition made up of the political savvy and the lowest classes. He says it’s the end of Director’s Law:
So, perhaps every society has a different optimal coalition at various times, and currently I don’t see what will keep it from bringing everything down to the coalition of a few elites, sincerely deluded as to their belief in the virtue of government spending, combined with a vast entitlement mob at the bottom, all literally feeding off the middle class. It sounds a lot like South America.
I’m not certain Eric’s got it right here, though. I wouldn’t repeal Director’s Law yet. There’s a publicly funded middle class that is still grabbing, grasping, gripping, plucking, possessing and raiding quite well. Just like old times. The inexcusable public pensions, the outlandish salaries for cops, tenured public school teachers, and city managers, the coming baby boom entitlement tsunami, increasingly generous student loan programs for increasingly useless undergraduate degrees, bailouts for unions, banks and insiders—all of this is tribute paid by the rich and the for-profit middle to the politically connected. The demographics have changed some, but not completely.
Anyway, Milton Friedman explains Director’s Law here:
Scott Adams on Startup Countries
The always-interesting Scott Adams, of Dilbert fame, wants to let a thousand nations bloom. Elsewhere, he has said that understanding economics is like having a mild superpower. He shows off that superpower by channelling Mancur Olson’s argument in The Rise and Decline of Nations:
One of the biggest problems with the world is that we’re bound by so many legacy systems. For example, it’s hard to deal with global warming because there are so many entrenched interests. It’s problematic to get power from where it can best be generated to where people live. The tax system is a mess. Banking is a hodgepodge of regulations and products glued together. I could go on. The point is that anything that has been around for awhile is a complicated and inconvenient mess compared to what its ideal form could be.
His solution should be familiar to readers of this blog:
My idea for today is that established nations could launch startup countries within their own borders, free of all the legacy restrictions in the parent country. The startup country, let’s say the size of modern day Israel, would be designed from the ground up for efficiency.
As Katherine Mangu-Ward at Hit & Run points out, startup Adams’s startup countries are essentially Paul Romer’s charter cities. Adams wants to centrally plan the country quite a bit more than Romer and other competitive government advocates, failing to recognize that competition is a discovery process which could continually improve government through opt-in experimentation.
I have no idea whether Adams is familiar with Mancur Olson’s work, charter cities, free zones, or seasteading. It’s clear that he gets the power of bloodless instability, though, and even uses one of our favourite examples:
Arguably, China accidentally performed a variant of this experiment with Hong Kong. Oversimplifying the history, Hong Kong was part of China and leased to the United Kingdom for 99 years, like a startup country within a country. When the lease expired, China presumably made a fortune by getting it back in a far more robust form than it could have generated within the Chinese system.
Hat tip: Crampton.
Link Archipelago
- The Paleo Right of Exit When the Tribe Has Spoken: Robin Hanson comments on last month’s Cato Unbound, “Yes,’to each his own’ is not how foragers dealt with topics that induced strong feelings; the band talked, made a choice, and those who couldn’t accept it left for other bands…Large nations of today, however, are far harder to leave than were ancient forager bands.”
- Via Cheryl Cline at Der Blaustrumpf: How Wikileaks uses jurisdictional arbitrage to chase the truth and protect itself.
- A Hopeful Precedent For New Sovereignties? The International Court of Justice has ruled that Kosovo’s 2008 declaration of independence from Serbia did not violate international law.
- Secesion Del Norte De Mexico: No esperemos a que las cosas cambien u otros las empeoren, hagamos que cambien. Es tiempo de volar!
Peggy Noonan Worries Secession May Be Near
In today’s WSJ, the former Reagan speechwriter senses secession might be more probable than you’d think. For the first time in American history, she says, our kids will be worse off than we are. And to this, the elite have been deaf. They continue droning on, a metronome of witless dogma, too much power acting on too little knowledge. All of this will have consequences:
I can imagine, for instance, in the year 2020 or so, a movement in some states to break away from the union. Which would bring about, of course, a drama of Lincolnian darkness. . . . You will know that things have reached a bad pass when Newsweek and Time, if they still exist 15 years from now, do cover stories on a surprising, and disturbing trend: aging baby boomers leaving America, taking what savings they have…
She’s quoting herself there from 1994, but it came back to her because she read a story on Drudge about Americans in London giving up their citizenship. Imagine that.
Political Creationists
Bryan Caplan approvingly quotes Don Boudreaux:
And It said “Let there be higher wages. And there was.”
[…]
So why are so many people enthusiastic about statutes such as this one [the living wage]?
Proponents of such legislation are economic creationists. They do not grasp the fact that beneficial economic arrangements emerge – and emerge only – without being designed by an altruistic higher power (namely, government). Widespread prosperity and economic order are taken on faith as resulting from the conscious intercession of a sovereign superior whose incantations, ceremonies, and commands work miracles.
Yet Don Boudreaux any many other libertarian economists constantly (as I have commented) commit Political Creationism:
And It said “Let there be better policies. And there was.”
[…]
So why are so many people enthusiastic about policies such as this one [laisse-faire]?
Proponents of such legislation are political creationists. They do not grasp the fact that political arrangements emerge – and emerge only – without being designed by an altruistic higher power (namely, economics professors). Widespread harm to prosperity and economic disorder are taken on faith as resulting from the lack of intercession of an enlightened superior whose arguments, essays, and rhetoric work miracles.
We’ve had many decades of brilliant rhetoric and clear exposition of the principles of a free economy by giants such as my grandfather Milton Friedman, Ayn Rand (still selling hundreds of thousands of copies a year), more recently Ron Paul, and of course, Don Boudreaux himself. Yet our economy is far from free, and getting worse. Furthermore, thanks to public choice economics, we now have theoretical and empirical evidence for why democracies produce bad policies. We can no longer plead ignorance and stick with the gut hypothesis of Political Creationism – that better policies will come from wise economics professors speaking louder and more often. As I said in a recent talk to a Silicon Valley audience:
Those of you who are into politics and cheering for the red hats or the blue hats or whatever, I don’t know how to say this gently so I’ll just say that you’re looking at things totally wrong, futzing with little implementation details and bringing on new software architects when the reason things keep breaking is that the OS is 234 years old and buggy as hell and we’ve known for decades that the basic algorithm is wrong.
If anyone should understand why we need to fix the damn incentive system and not just cheer, it should be economics professors, particularly free market ones. Yet my experience is that Political Creationism is the rule in this group. Which is disappointing – it’s as if public choice theory is only real to them when they are teaching it, and not when they are writing letters to the editor or coming up with strategies for change.
Fortunately, a good strategy like seasteading, one which can withstand the public choice arguments that Boudreaux’s strategy cannot, does not require convincing economics professors. Instead of trying to provide the public good of economic education, we can offer the private good of low-regulation real estate. As the market grows, costs come down, which further grows the market in a virtuous circle, like any new technology.
And once we have truly free cities competing for citizen-customers, it should delight economists, especially libertarian ones. Perhaps they will even, finally, believe that their own theories apply not merely in the classroom, and not merely to criticizing politics, but also to fixing the problem.
Egalitarians Against Democracy
Markets find ways to deliver to niche interests. The plethora of choice on Amazon far outstrips the binary choice in many elections. If your values are drastically different from the norm, you’ve got a better chance of satisfying them in a market. And if your political values differ from the common lot, then it ought to follow that you’d prefer a market in governance. As the long tail story goes, the larger the shelf space, the greater the variety. And yet despite this fact, I find many folks with weird political views undermining their ideals by embracing democracy.
Consider political philosophers who have far from moderate views, like Thomas Nagel, G.A. Cohen, and Derek Parfit. They have strange beliefs about justice, devoting an extraordinary amount of attention to determining the best way to distribute goods. Injustice for these egalitarians is when some people are worse off than others. (For elaboration and refinement, see Parfit’s Equality and Priority.) It should stand to reason that, given their niche beliefs about distributive justice, they would support a market in governance, where it will be more likely that some government will satisfy their obscure principles. Democracies certainly won’t enshrine them. No government actively pursues anything remotely similar to what these men call a just state. You would think they’d want more variety. A market in governance would offer it, and yet all of these men are skeptical of markets.
So it was refreshing to find an egalitarian essay that is critical of democracy and that advocates for increasing the number of nation states by means of peaceful secession. If you’re a zealot for distributive principles, you have to accept that democratic procedures will often yield results out of sync with your preferred principles of justice. Democracy and distributive justice are values in conflict. The author says this is why democracy is wrong:
In a large ocean there are two neighbouring islands: faultless democracies with full civil and political rights. One island is extremely rich and prosperous, and has 10 million inhabitants. The other is extremely poor: it has 100 million inhabitants, who live by subsistence farming. After a bad harvest last year, there are no food stocks, and now the harvest has failed again: 90 million people are facing death by starvation. The democratically elected government of the poor island asks for help, and the democratically elected government of the rich island organises a referendum on the issue. There are three options: Option A is a sharp increase in taxes, to pay for large-scale permanent structural transfers to the poor island. Option B is some increase in taxes, to pay for immediate and sufficient humanitarian aid, so that famine will be averted. Option C is no extra taxes and no aid. When the votes are counted, 100% of the voters have chosen Option C. After all, who wants to pay more taxes?
So 90 million people starve. Yet all electoral procedures on both islands are free and fair, the media are free, political campaigning is free, there is no political repression of any kind. According to democratic theory, any outcome of this democratic process must be respected. Two perfect democracies have functioned perfectly: if you believe the supporters of democracy, that is morally admirable. But it clearly is not: there is something fundamentally wrong with democracy, if it allows this outcome.
It’s a rambling essay, but I find many of its points are honest and worth thinking about. If you have any progressive friends you want to win and influence, pass it along.
Radicals for Rules
Our sometime contributor Max Borders recently gave a talk at the John Locke Foundation on the idea of governance as a rule-based technology. He makes the case for non-territorial competitive government, or what he calls panarchy, but the video also works as great introduction to many of the ideas you’ll find discussed on our blog. You can view the whole talk here, or get a taste below:
A Critique of Purely Weak Reason
At the Edge, moral psychologist Jonathan Haidt recommends a thought provoking paper on the function of reasoning in human interaction. In case you haven’t heard, it turns out Reason is a shameless lawyer kept on retainer by our desires. We’re hardwired to argue to attain higher in-group status and to form winning coalitions. Contrary to what intellectuals, Kant, Rawlsians, deliberative democrats, and other wordsmiths in the academic zoo will tell you, argument is seldom about truth seeking. It is about winning. Sez Haidt:
It’s called, “Why Do Humans Reason? Arguments for an Argumentative Theory,” by Hugo Mercier and Dan Sperber. The article is a review of a puzzle that has bedeviled researchers in cognitive psychology and social cognition for a long time. The puzzle is, why are humans so amazingly bad at reasoning in some contexts, and so amazingly good in others?
So, for example, why can’t people solve the Wason Four-Card Task, lots of basic syllogisms? Why do people sometimes do worse when you tell them to think about a problem or reason through it, than if you don’t give them any special instructions?
Why is the confirmation bias, in particular— this is the most damaging one of all—why is the confirmation bias so ineradicable? That is, why do people automatically search for evidence to support whatever they start off believing, and why is it impossible to train them to undo that? It’s almost impossible. Nobody’s found a way to teach critical thinking that gets people to automatically reflect on, well, what’s wrong with my position?
And finally, why is reasoning so biased and motivated whenever self-interest or self-presentation are at stake? Wouldn’t it be adaptive to know the truth in social situations, before you then try to manipulate?
The answer, according to Mercier and Sperber, is that reasoning was not designed to pursue the truth. Reasoning was designed by evolution to help us win arguments. That’s why they call it The Argumentative Theory of Reasoning. So, as they put it, and it’s here on your handout, ‘The evidence reviewed here shows not only that reasoning falls quite short of reliably delivering rational beliefs and rational decisions. It may even be, in a variety of cases, detrimental to rationality. Reasoning can lead to poor outcomes, not because humans are bad at it, but because they systematically strive for arguments that justify their beliefs or their actions. This explains the confirmation bias, motivated reasoning, and reason-based choice, among other things.’
Here is one version of the paper. Our ignorance and the biases of deliberative reason bedevil our thinking about governance and national rule-sets. We may know our values but we don’t know how to ensure institutions, laws and norms will protect and nurture them. Our imaginations are also very weak. The credibility of any moral argument for one set of rules ought to be weighed against the weaknesses of the deliberative process of which it is part. Truth seeking does not come naturally so if we care about such things, we ought to pay greater attention to the incentives for finding them. In one on one moral argument, those incentives are rarely present.
Anarchy And Efficient Law: David Friedman Talk Video
This is going to be a quick and rambling post, since Mike Gibson & I just got back from the floating festival formerly known as Ephemerisle and are sleep-deprived, sunburned, and waterlogged :).
Anyway, one of the promising political systems that I’d like to see tried someday on a seastead is the terribly-named “anarcho capitalism”. With the recent public domain release of David Friedman’s Machinery of Freedom (PDF), we have a great book introduction. And now, if you are looking for a video introduction, thanks to the Mises Brazil Institute, here is David Friedman’s talk on Anarchy & Efficient Law at the first Mises Brazil Forum. While one video can’t cover the complexities of this radically innovative government system, he lays out the basic argument for why it should consistently produce laws that maximize overall good better than democracy does. The argument is found in more detail in the paper Anarchy & Efficient Law.
Let A Thousand Nations Bloom 