A Defense of ‘Crazy Libertarian Utopias for Techies’

Y Combinator wants to build a city. For the first stage of their project they are looking to hire a researcher. I already commented on their project, which I think is awesome. However, they state that they do not want to build a ‘crazy libertarian utopia for techies’ (CLUT). I think they are mistaken. CLUTs can increase the rate of technological innovation, helping all of humanity.

First, however, it is necessary to clarify what a CLUT is. I define it as a city with low taxes, few regulations, and a high concentration of tech companies. Building a new CLUT would require a degree of legal autonomy to lower taxes and eliminate harmful regulations, as well as an urban environment to attract millennials who are typically the core workforce in tech companies. More generally, a CLUT would be designed to appeal to specific type of person, the techie, and as such, be less attractive to wider swaths of the population. CLUTs are inevitably elitist, as the income and taste of tech workers differs from the general population.

Nevertheless, despite the elitism of CLUTs, such cities have the potential to help all of humanity. The purpose of CLUTs is not to attract libertarian techies, but rather to offer a space for technological innovation. Typically, only the wealthy are able to afford technological advances. However, as products mature, costs fall and they become available to wider segments of the population. As such, technology benefits nearly everyone in the long run.

However, technological innovation is more important than that. Technological innovation is the driver of long run economic growth. Technological innovation is responsible for the industrial revolution, increasing incomes by a factor of 30 over 200 years. Increasing growth depends on technological innovation.

Further, it is clear the current regulatory system is depressing innovation. Uber and AirBnB, the two most prominent companies of the sharing economy were both illegal, and to some extent still are. Uber violated taxi regulations in most cities and the majority of properties listed on AirBnB violate the Americans with Disabilities Act. Amazon moved their drone program to Canada because the FAA was too slow in issuing regulations for drones.

Overregulation has also limited tech company’s involvement in health care. 23andMe had to stop providing information on disease prevalence because of the FDA. Alphabet, formerly Google, has limited investment in health care because of overregulation.  What unicorns have not been founded, or have failed, because of overregulation?

A single CLUT could immediately save thousands of lives a year. Consider a program that would compensate, which is currently illegal, liver donors. Nearly 5,000 people die annually who are waiting for a new liver. Such a program could be experimented with then perfected in a CLUT, before being rolled out to the rest of the country. Similarly, why not let Alphabet disrupt health care? Our most innovative people and companies are currently constrained by an outdated regulatory system.

Yes, companies and people will make mistakes. There could be another Theranos, or worse. However, that is how innovation happens. The potential downsides will be concentrated only on those who voluntarily choose to live in a CLUT. The benefits will eventually spread throughout mankind. It is for these reasons I urge YC to reconsider, and not dismiss building a crazy libertarian utopia for techies.

The Discourse of Free Cities

Adam Gurri kindly invited me to write for Sweet Talk. The piece is excerpted below.

Building free cities means changing the mind of McKinsey and World Bank types. Free cities have to be normalized. As such they can no longer be fevered dreams to create a libertarian utopia or a techno-futurist city. Instead, free cities must be seen as adopting the best practices of governance, as an addition to the existing world order, not an attempt to opt out from it. Institutional change requires the ruling elite. Advocates of free cities should heed that lesson.

Y Combinator wants to build a city, awesome!

Y Combinator just announced a very exciting project on cities. The first stage of the project is research, but they claim “We’re seriously interested in building new cities and we think we know how to finance it if everything else makes sense”. They follow in the footsteps of Peter Thiel, The Seasteading Institute, and Balaji Srinivasan’s talk on Silicon Valley’s Ultimate Exit. Of course, the particulars of each vision is distinct. Given I have spent a great deal of time thinking about cities from a relatively distinct perspective, I thought I would share some thoughts on their project.

First, there are three important aspects to consider when building a new city, physical infrastructure, local governance, and legal institutions. Most urban planners focus on the physical infrastructure. They view the city as a big construction project, a la Sim City, neglecting local governance and legal institutions.

The second aspect is local governance; zoning, land use regulations, and other issues typically decided on the city level, which is slowly gaining more attention. Sidewalk Labs appears to be focusing on local governance, and YC is rightly also interested in local governance.

The third aspect is legal institutions. Now, YC writes, “our goal is to design the best possible city given the constraints of existing laws.” I believe this is a mistake. Improving the legal institutions is the low hanging fruit for new cities (I term cities with legal autonomy free cities). The importance of the legal institutions depends on the host country. However, there are two useful analytic categories, free cities in the developed world and free cities in the developing world.

This relates to another important question, in what country to build the city. Developing countries, primarily in Asia and Africa have rapidly urbanizing populations creating a greater demand for new cities. North America and Europe, on the other hand, are urbanized and new cities would have to compete with existing cities.

With regard to legal institutions, new cities in the developing world are playing catch up. Simply importing common law would be a huge competitive advantage. In Africa, for example, a city using common law could reasonably claim to have the best governance in the continent. New cities in the developed world are different. The developed world is already governed reasonably well. New cities in the developed world could instead attract tech innovators with a well-designed regulatory system, turning ‘Detroit into Drone Valley’. Given that technology is the driver of long run economic growth, such innovation zones are surely a worthy cause.

Given my chats with urban planners and architects who are involved in new cities, I am very happy to see Silicon Valley, and especially YC take an interest in cities. Even if their city project does not work out, I’m sure they will be a valuable addition to the discussion.

New Cities Summit

I recently attended the New Cities Summit in Montreal hosted by the New Cities Foundation. The New Cities Foundation is arguably the gold standard for non-profits focused on cities and the conference did not disappoint. It was attended by mayors, CEOS, and entrepreneurs, with most of the attendees being urban planners and architects. The conference was enlightening for me as I come from a different background than most of the attendees. There are three interesting aspects worth highlighting.

First, during a roundtable, the mayor of San Antonio mentioned implementing body cams for her police force. She acknowledged that body cameras are seen as best practices, which is a positive sign. However, she also focused on the practical difficulties of implementing them, having a server to host the video, when to release video to the public, and ensuring compatibility across different departments. I found her comments interesting as a tech company could have solved the organizational issues in a number of weeks, if not days, while the process she described would take months, if not years.

Second, there was a workshop on the idea of self-driving cars. There was a lot of excitement for self-driving cars, and given the conference was geared toward establishment types, such excitement is a positive sign. At the same time, there was much discussion of regulation. I was the only consistent voice worrying about how regulation could slow the development of self-driving cars, though participants seemed open to my suggestions.

Third, there was a discussion of new cities. Sarah Moser led the discussion, with King Abdullah Economic City, Gale International, the Incheon Free Trade Zone, and Rendeavour discussing their projects. Sarah estimated there were over 100 new city projects around the world, and having access to academic discussions from a different perspective was fascinating. There also was a surprising interest in legal autonomy and how such autonomy could improve new cities.

I came away from the conference with confidence about the future of free cities. Most participants I chatted with were open to the idea. At the same time, there is still too much focus on the physical nature of cities, simply conceiving of them as large construction projects. That being said, the trend lines are generally positive.

Londependence

Now that Brexit has occurred, what’s next for London? One option that is gaining a surprising, though still small, amount of traction is for London to secede from Britain and become a city state. Of course, this is unlikely to happen I the near future. However, it is worth considering Londependence as part of broader trends.

This blog focuses on new cities. I still believe that new cities are the most likely avenue for the emergence of free cities. It is far easier to gain autonomy in a rural area without special interests than in an existing city. Nevertheless, it is possible, and increasingly probable, that existing cities become more independent, slowly, and sometimes rapidly, asserting their autonomy. London is an example of the trend. Venice is further along, having already held an unofficial referendum on independence from Italy. Lagos has gained autonomy incrementally as it demonstrates its capacity for good governance.

Also pointing to this trend are thought leaders extolling the virtues of cities. Benjamin Barber has a TED talk on why mayors should rule the world. Parag Khanna has repeatedly stressed the rising importance of cities on the world stage. Balaji Srinivasan argues for Silicon Valley to exit.

The causes of this trend, like any major geo-political trend, are complex and difficult to understand. Nevertheless, a broad reason for the slow reemergence of city states is globalization. Barriers to trade have greatly fallen in the post-war era. Nation states emerged in part to create internal free trade zones. As external trade barriers fall, the advantages of nations become more limited.

In the short term, Londependence will not occur. However, Brexit was unexpected. As the failings of nation states become more apparent, the trend toward city states will accelerate. Londependence might herald our future of city states.

A Typology of Free Cities

Broadly speaking, free cities can be split into two categories, those built in the developed world and those built in the developing world. The different environment of living in either the developed or developing world shapes the logic of free cities.

The developing world is, generally speaking, poor, poorly governed, and urbanizing. This means that improvements in governance can largely be accomplished by copying successful examples. There is no need to reinvent the wheel, only reproduce it. The urbanizing population means that there is a population which is relatively easy to attract to a new city. In practice this means a free city can thrive in the developing world simply by importing common law.

The developed world is, by and large, wealthy, well governed, and urban. This means that improvements in governance must be genuine innovations, not mere copies. Further, the lack of an urbanizing population means that new residents must be drawn from existing cities. One avenue for free cities in the developed world is to attract technology companies. Google, for example, has said they do not invest in health care because it is overregulated. An environment of permisionless innovation could create a thriving free city in the developed world.

The Normality of Free Cities

The first reaction to discussing free cities is confusion. After an explanation, the second reaction is typically detached bemusement. Free cities are seen as attempts to create libertarian utopias, tax havens, or playgrounds for the rich. They are perceived as kooky and unserious.

This is a mistake. Free cities have two defining features. First, autonomy from the host country. Second, new institutions for the city. It is, of course, possible to propose kooky new institutions for a free city. However, such proposals are unlikely to gain traction and the necessary resources to build a city.

More likely, and what I propose, is to use best practices from around the world to create the best institutions possible. Abstractly this means rule of law, property rights, and economic freedom. Such ideas are hardly radical; they have been espoused by the Washington Consensus for years. Most economists would agree that rule of law, property rights, and economic freedom are some of the most, if not the most, determinants of economic success.

What is new about free cities is not the policies they will likely implement, but the manner in which those policies are implemented. The traditional model is that the nation state creates a legal baseline. Cities and towns can add to that baseline, increasing taxes or regulatory requirements for example, but not opt out of it. A special economic zone is an institutional arrangement which allows territories to opt out of aspects of the institutional baseline.

A free city is an institutional arrangement which allows a territory to opt out of most aspects of the institutional baseline. In recent history, this is a radical change. However, it is a radical change necessary to import good institutions; rule of law, property rights, and economic freedom. We already know what works. Free cities offer a path to get there.

Free Cities Trends

For the second post of the Free Cities Initiative, I would like to discuss trends I see as leading to free cities. Most people I speak to are skeptical of free cities. I, on the other hand, am convinced that free cities are by and large inevitable. I believe this difference in understanding largely arises because of different information. Two trends, which are not yet common knowledge, point to the emergence of free cities. Those trends are the creation of special economic zones (SEZs) and new cities. In this piece I provide a brief overview of those trends and why they lead to free cities.

The first important trend is humanity’s rapid urbanization and the cities that must be built to accommodate it. The UN estimates there will be an additional 2.5 billion urban residents by 2050. While some of these residents will be accommodated by expanding existing cities, others will transform sleepy towns and rural areas to booming metropolises. Shenzhen, for example, was a fishing village of 30,000 people in 1980 and now the metropolitan area has over 18 million residents.

The New Cities Foundation gives the best overview of new cities being constructed. Their annual report from the King Abdullah Economic City forum profiles new city projects in the annex. Of course, cities which will grow organically are not included. However, the numerous multi-billion dollar projects suggest an opportunity for free cities. The new cities have capital, and some of them have the influence to receive a degree of autonomy. However, they do not appear to realize the importance of institutions in economic growth. The most recent report briefly mentions the legal side, only discussing taxes and business registration. While both important, ensuring long term growth potential for cities in developing countries requires thinking more radically about institutional reform.

With that being said, I believe the New Cities Foundation is slowly realizing the importance of institutions in economic development. Previous reports failed to mention legal autonomy. I suspect the next report will have more discussion on legal autonomy than the previous one.

The second trend is SEZs. SEZs are forerunners to free cities, they are pockets of autonomy where certain national laws and regulations do not apply. Of course, they differ in several important aspects. First, SEZs are typically small, rarely encompassing a city. Second, the autonomy for most SEZs is relatively minor. Such autonomy might encompass lower taxes or expedited customs, but does not represent a new legal system, merely slight alterations to the existing one.

Nevertheless, SEZs represent something of a challenge to the traditional notion of a nation state, an area where a sovereign body sets the baseline legal standard. As such, it is reasonable to suggest that the number and trend of SEZs is roughly correlated with the likelihood of building a free city. A world where minor autonomy is acceptable is more likely to accept major autonomy than a world where no autonomy is acceptable.

The trends of SEZs suggest that autonomy is becoming increasingly acceptable. Over the last thirty years, there has been an explosion in the number of SEZs. Ireland founded the first one in 1959. For the next twenty years’ growth in the number of SEZs was relatively slow. However, in the 80’s growth accelerated, accelerating again in the 90’s. Currently there are over 4,000 SEZs worldwide in 73 countries.

Since Dubai, Honduras has come closest to allowing the autonomy necessary to create a free city with the ZEDE (zona de empleo y desarollo economico) legislation. The legislation creates a process by which territories can opt out of Honduran commercial law and import common law. Unfortunately, politics in Honduras has slowed implementation of the law.

The final indicator of that free cities time has arrived is the recent discussions about them. For example, Paul Romer’s Charter Cities. There is a reason the proposal occurred when it did. Twenty years ago it would have been unthinkable. In another fifteen years such an idea could become common sense. Similarly, Naguib Sawiris proposed buying a Greek island to house Syrian refugees.

Such ideas are becoming increasingly commonplace. While they are still largely outside the range of acceptable political discussion, they will not remain that way. So long as these trends continue, free cities are coming.

Introduction to Free Cities

The Free Cities Initiative is dedicated to understanding and advocating for free cities. A free city is a city with partial or complete autonomy. This blog believes that free cities can rapidly improve governance and spark economic growth in the developing world, as well as offer pockets of innovation to accelerate technological development in the developed world. While many organizations and blogs focus on cities, few consider legal autonomy, administrative organization, or the user experience of residents. Themes of this blog include trends of free cities, the autonomy of free cities, administration of cities, the history of free cities, and the user experience of city residents.

Consider the cities which have experienced the most growth in the post-war era. Of the top five, three are free cities, Hong Kong, Singapore, and Dubai. Their success was predictable and is replicable. Rule of law, property rights, and economic freedom are necessary, and arguably sufficient conditions for economic development. Unfortunately, history shows it is difficult for countries to rapidly improve their institutions on a national level.

Free cities offer an alternative. By taking land with few special interests or residents, free cities have little impact on the political equilibrium. This allows more rapid institutional improvement, and therefore economic development, than would otherwise be possible. The institutional improvements would not only help the residents of the city, but show the rest of the country the benefits of rule of law, property rights, and economic freedom.

It is also important to note the governance structure of free cities. I use it as an umbrella term, including charter cities, proprietary cities, startup cities, and other governance structures that have yet to be considered. Currently I am relatively agnostic on the governance structure, each has advantages and disadvantages. The important unifying element, however, is the institutional autonomy.

Free cities can be built for the developing world or the developed world. The developing world has a rapidly urbanizing population and is poorly governed. A free city in the developing world would not need to build new institutions, merely import them from successful countries. The developed world is urbanized and well governed. However, there remain opportunities for free cities with regards to technological innovation. Amazon, for example, moved their drone program to Canada because the FAA was unable to develop an appropriate regulatory system in a timely manner. A free city in the developed world could truly embrace permissionless innovation.

There are two trends which point to the emergence of free cities. First, the creation of SEZs. While SEZs are not free cities, they are pockets of autonomy. The Economist writes that there are now more than 4,000 SEZs. Second, the emergence of private cities. Numerous multi-billion dollar private cities are being constructed. However, few have autonomy. Honduras passed a law to allow for the creation of ZEDEs (zonas de empleo y desarollo economico), a kind of free city. Should these trends continue they will likely culminate in free cities.

The purpose of this blog is to become the go to develop a narrative surrounding free cities and become the go to location for information on free cities. While the long term goal is to provide commentary on free cities, during the short term I will write a series of posts to better develop the idea, including, but not limited to, trends in free cities, barriers to the creation of free cities, and overview of the likely policies of free cities.

I am looking for additional contributors to this blog. If you are interested, please contact me at Mlutter at freecitiesinitiative.com.