In a conversation with Laura Esposito at the Center for Global Prosperity, I pointed out that allowing entrepreneurs to create prosperity is the most important goal for Free Cities:
…the most urgent need is to create access to these world-class legal systems so that of the billions of potentially entrepreneurial people in the developing world a growing fraction of them can begin to create scaleable legal businesses that create jobs, opportunity, prosperity, role models, and peace in nations where these are most needed.
Her reply shows that she is thinking about Free Cities in a manner that is very different from how I am thinking about them:
However, if there remains this pent up entrepreneurial talent, I find it difficult to believe that those countries would willingly allow those people to leave to inhabit a new city abroad. In some senses, if this entrepreneurial ability can be recognized within the country through changes in the legal system, there would be no incentive for that country to allow its citizens to move their entrepreneurial talent to benefit the development of others.
I’ll break this down. First,
if there remains this pent up entrepreneurial talent,
To me, a glance at the incredible obstacles in Doing Business indices, combined with the entrepreneurial energies described by Hernando de Soto, Enrique Ghersi, and Mario Ghibellini, in “El Otro Sendero” (The Other Path in English) in the microentrepreneur movement globally (or by any observer of street vendors in the developing world), suggests that there is plenty of entrepreneurial talent.
The talent will rarely be the “heroic” entrepreneur in the mold of Steve Jobs. But a key difference between, say, the U.S. and developing nations is that in the U.S. almost anyone can open a restaurant, a carpentry service, a cleaning service, etc. and enjoy all of the benefits of being within the legal system. The Millionaire Next Door documents that most individuals with assets over a million dollars in the U.S. are small business owners with mediocre academic records. We educated elites think that success is about education, but in fact it is often about hard-working, entrepreneurial individuals creating millions of mundane but reliable businesses. Access to a good legal system is just as important to these people as it is to the prospective founders of Apple, Nike, etc.
But the real issue is the fact that even well-meaning individuals in most nations cannot improve the legal system enough to make it entrepreneur-friendly. Esposito is correct insofar as she is suggesting that, say, most Senegalese would prefer that entrepreneurial Senegalese stay in Senegal, or that most Hondurans would prefer that entrepreneurial Hondurans stay in Honduras. But the problem is that even if most Senegalese, or Hondurans, or whomever would prefer a certain outcome does not imply that such an outcome is possible. Thus when she suggests:
if this entrepreneurial ability can be recognized within the country through changes in the legal system, there would be no incentive for that country to allow its citizens to move their entrepreneurial talent to benefit the development of others.
We are now at the heart of the issue: “Countries” don’t have incentives. Individual human beings do, and public choice theory has clearly established the systemic areas of dysfunction that arise in governments. Even if individuals are all well-intentioned (not always the case), it is exceedingly difficult for the collective process of legislation to create good law. Indeed, it may be impossible to create an system of good law by means of piecemeal legislation.
Legislators in Honduras — from across the political spectrum — have acknowledged this in explaining why they voted for legislation authorizing Special Development Regions there. The main argument for creating regions with new legal systems (be they “Charter Cities,” “Free Cities,” or whatever) is that it is basically impossible to create good legislation that would apply to the whole country . Imagine trying to create an Apple computer, or any computer, by means of legislation — it can’t be done.
The common law legal system, which is better for commerce and prosperity than are civil law legal systems, is the result of a market for law in the middle ages. Merchants chose which judges they trusted to arbitrate their disputes, and over centuries of such a “competitive market” in law, the Lex Mercatoria became a very good system for commerce. It was eventually incorporated into British common law, which has now allowed for stunning prosperity in most nations with common law legal institutions.
Of course, these are mere introductions to sophisticated issues which will be developed throughout the site and in future blog posts.
