Fostering Competition in Law and Governance

Michael Stronghttps://socraticexperience.com
Michael Strong is founder of The Socratic Experience, a virtual school, author of The Habit of Thought: From Socratic Seminars to Socratic Practice, and Be the Solution: How Entrepreneurs and Conscious Capitalists Can Solve All the World's Problems, blogged at Let a Thousand Nations Bloom, and promotes Startup Cities in Latin America and Africa with his wife, Magatte Wade.

Strong’s Law:

Ceteris parabis, properly structured free enterprise always results over time in higher quality, lower cost, and more customized products and services. 

We need to unleash entrepreneurs of happiness and well-being so that the world’s eight8 (soon to be nine9) billion people are able to experience ever deeper well-being, at less cost, with more niche approaches to living fulfilling, flourishing lives.

There are four components to understanding this perspective:

  1. From bits and atoms technology to human technology,
  2. Innovative governance as an industry,
  3. Cultural innovation as a forthcoming industry,
  4. How to accelerate understanding and action aligned with this positive future.

This essay focuses on the first two components.

From Bits and Atoms Technology to Human Technology

The principle of innovation leading to “higher quality, lower cost” is familiar in the realm of technology.

By the late nineteenth century, the miracle of the market had become readily apparent. Tea, coffee, sugar, cotton clothing, books, magazines, postcards, long-distance travel (trains and ships), communication (telegraphs), etc., all started out as expensive novelties for elites and gradually became affordable by the masses. The middle-class lifestyle as we know it moved within reach of much of the working class of Britain and the US over the course of the nineteenth century thanks to the relentlessly innovative process of creative destruction.

More recently, Moore’s law has resulted in dramatic improvements in information technology (IT), but I focus on the earlier examples to remind us that the order of magnitude improvements in cost and quality preceded IT and can extend beyond IT.

There is a familiar mechanism behind these constant improvements. Entrepreneurs obtain capital to develop and produce new products or services. Once an adequate market exists for the new offering, competing entities invest in continuous improvements in research, development, production, sales, marketing, and distribution to gain market share and earn profits. An endless cycle of competition results in endless refinements with respect to quality, cost, and niche product development.

Although there are countless dead ends, failures, pivots, and more associated with this process, few deny the overall process at this point.

In order to understand how to improve the human condition, we should have a vision for the full scope of such ongoing processes of improvement. In particular, there are two immense domains in which we have not generally allowed free enterprise to develop. Those are

  • 1. Entrepreneurial markets in law and governance, and
  • 2. Entrepreneurial markets in culture and community.

If we want to accelerate progress, we now need to explore markets in law, governance, culture, and community in order to allow all of humanity to benefit from an ongoing dynamic of lower cost, higher quality, and more customized services in these critical domains.

Innovative Governance as an Industry

Competition among both legal systems and jurisdictions have clearly been a net positive for humanity in the past.

Periods in which there have been competing systems of law and governance have resulted in key innovations in law and governance. The geography of Greece resulted in the plethora of city-states. Famously, Greek democracy and an associated cultural efflorescence was the result. Later, the proliferation of Italian city-states gave birth to modern republican government and another associated cultural efflorescence. More broadly, as Rosenberg and Birdzell argued, the political fragmentation of Europe led to de facto competition among states for capital and talent, with the ultimate result that Britain became the first society in which prosperity for the masses became the norm.

Earlier, the law markets of Europe, in which competing providers of commercial adjudication offered their dispute resolution services to merchants at trade fairs, developed the body of commercial law that was ultimately incorporated into the British common law. These legal principles, now enshrined in the common law, have proven to be such an advantageous legal technology that not only are former British colonies (Hong Kong, Singapore, the US, and CANZUK) on balance more prosperous than are colonies based on other legal systems (Hong Kong, Singapore, the US, and CANZUK), but other jurisdictions have adopted common law legal systems.

Rwanda began a gradual process of switching from civil law to common law following the 1994 genocide. In 2004, Dubai created the Dubai International Financial Centre (DIFC), a common law jurisdiction in a Ssharia law nation-state, in order to attract Big Finance. Dubai is now a top 10 global finance hub. In 2012, Dubai expanded the jurisdiction of the DIFC giving all residents of Dubai access to the benefits of common law commercial and civil dispute resolution along with common law legal procedure. Abu Dhabi recently copied the DIFC in 2015.

The DIFC and its followers may be seen as a critical recent development of the modern special economic zone (SEZ) movement, which itself may be seen as a global competition among special jurisdictions. As early as the 1930s, special free trade zones were designed to get around the disastrous trade barriers of that era. Subsequently zones spread around the world, creating islands of prosperity that eventually led to broader economic liberalization and prosperity in Korea, Taiwan, Mauritius, Mexico, Ireland, China, and many more jurisdictions. The Chinese SEZs, explicitly modeled on the extraordinary success of Hong Kong and Singapore, led to an estimated 10x ten times increase in average urban salaries, dramatically improving the lives of nearly a billion human beings.

These extraordinary developments in human prosperity, thanks to historical competitions in law and governance, have given birth to a self-conscious global movement working on the design of better legal jurisdictions to accelerate global prosperity for all. While Nobel laureate Paul Romer’s advocacy of “Charter Cities” is the most famous manifestation of this movement among global elites, Romer’s work was preceded by the Chinese SEZs, Dubai’s DIFC, and hundreds of free zone experts around the world.

In 2020, Honduras authorized Prospera, a common law jurisdiction within its borders in order to attract capital and talent. Prospera is a fully functioning example of a governance system designed by entrepreneurs in order to accelerate Honduran prosperity. Two other such jurisdictions have been authorized there based on the ZEDE legislation of 2012. These entrepreneurially -designed jurisdictions are giving birth to an extended market in other elements of the entrepreneurial legal ecosystem, such as low-cost online private arbitration.

We have only begun to develop a global, entrepreneurial ecosystem of diverse offerings of law and governance. The focus of these entrepreneurs is typically to attract talent and capital. But in order to do so, they also need to develop credible ways of guaranteeing the protection of rights. The sequence is likely to proceed from the protection of property rights, to the protection of civil rights, to the protection of human rights. To sketch the beginnings of this dynamic, the DIFC was originally focused on providing a common law framework only for commercial law. Criminal law was to remain under UAE sSharia law. But because Ssharia law does not have a strong reputation for protecting human rights, an immediate concern of expat banking personnel was the exact boundary between commercial law and criminal law within the DIFC. As a consequence, the DIFC courts developed a pro-active, customer-friendly approach to articulating this legal boundary. (Tthe DIFC website is one of the most customer-friendly governance sites in the world.).

In recent decades, it has become clear that legal institutions are a leading factor determining the prosperity of a nation. After the collapse of communism, the immense discrepancy between East and West German prosperity and that of North and South Korea hasd made it obvious that a more capitalist legal system resulted in greater prosperity. Global rankings such as the Doing Business Index (World Bank) and Economic Freedom Index (Fraser Institute and WSJ/Heritage) have demonstrated strong correlations between the quality of a business environment or overall economic freedom, respectively, and prosperity. New Institutional Economists such as Nobel laureate Douglass North and others have confirmed these tendencies through both theory and empirical work. From this perspective, global poverty is the result of poor law and governance.

Most markers of human well-being improve dramatically with GDP per capita, at least up to $50,K000 or so (and some evidence exists that they continue to improve well beyond that point). Insofar as we still have billions of people suffering unnecessarily;, mothers and children dying;, lives shortened through disease, physical pain, and deformity;, and the countless additional indignities and suffering due to poverty, those of us who are concerned about the global poor should unite in accelerating a global movement that will soon develop a trajectory similar to that of technology: continuously higher quality, lower cost, and more niche offerings in law and governance.

Finally, the Refugee Cities organization is an example of an urgently needed implementation of the idea of new jurisdictions. There are millions of refugees in refugee camps around the world. While originally conceived of as temporary solutions, at this point some refugees have been living in camps for decades, with generations being born and living their entire lives in such camps. Refugee Cities is an organization focused on creating new jurisdictions with governance mechanisms designed to allow such refugees to develop functioning, sophisticated economies rather than relying on largely grey- market trade and NGO handouts. By means of allowing for the creation of new jurisdictions and governance for refugees, we can take an important step towards allowing them to create prosperous, dignified futures for themselves while also allowing for new forms of governance to come into being.

Institutional Diversity in the Entrepreneurial Creation of Law and Governance

In technology-driven markets, most innovation has been driven by profit-seeking enterprises financed by ROI-seeking investors. This does not mean that innovation is only driven by profit-seeking enterprises;, only that in the realm of technology, free enterprise has, on balance, outperformed other models. But an open system for innovation in law and governance does not need to require that new models in law and governance be driven by profit-seeking enterprises.

Vincent and Elinor Ostrom (herself a Nobel laureate in economics) stressed the importance of institutional diversity. In addition to “governments” and “corporations,” there are many diverse forms of institutions, including non-profits, trusts, condominium associations, HOAs, and various quasi-government entities governing water rights, grazing rights, etc. Ex ante we don’t need to assume that any particular species of governance provider will win out. It may be that the best way of ensuring the credible protection of rights for incoming residents may be mixed models that combine various legal forms.

That said, successful innovations are likely to be at least partially driven by for-profit enterprise. David Friedman explains why in his essay on “Capitalist Trucks:”

You wish to buy a truck, and have a choice of two. One was built in Detroit, one was built in the Soviet Union. Which do you choose?

Most people would choose the capitalist truck. Why? Both are trucks. If they are identically built, they should function in exactly the same way–—why does their history matter? Why should we care about the ideology of a truck?

The answer is that the two trucks are not identically built. The capitalist truck was built under a system of institutions in which people who build bad trucks are likely to lose money. The communist truck was built under institutions in which people who build good trucks are likely to lose money and often other things as well, since the result of insisting on only building good trucks is likely to be failing to meet your assigned quota for the month.

But again, there is no need whatsoever for ideology to play a role ex ante in outcomes. We need to allow diverse law and governance providers the opportunity to offer their goods to prospective residents. Different residents will choose different bundles of rights and privileges when they choose their jurisdiction of residence. If people want to launch purely socialist or democratic majoritarian jurisdictions, and most people want to move there, then those are the jurisdictions that will win in the global governance competition.

Should We Care If Entrepreneurial Jurisdictions Are More or Less Democratic?

Most people take contemporary “democracy” as a universal standard of successful governance. But even with modest understanding of governance systems, one quickly discovers that there are countless choices for voting systems, for representation systems, for scale and subsidiarity, for boundaries and definitions of who is included in the franchise, etc. Beyond such structural variations, most understandings of “democracy” are premised on various additional considerations, including a literate population, freedom of the press, and some kind of active political participation as a norm. Even if some “we” were somehow able to limit the range of possible governance options to those which are “democratic,” if we were to allow more new entrants in the field there would be countless untried variants. Finally, most political thinkers recognize that human rights should supersede majoritarian decision-making; the U.S. Bill of Rights is one clear example of explicit rights designed to protect against the “tyranny of the majority.” Most economists would also agree that some kind of protection for property rights is essential for prosperity; if majorities can arbitrarily confiscate property, the long- run impact is economic ruin.

Moreover, from the perspective of advancing prosperity, several of the political entities that have been most successful in improving the material well-being of their citizens in the past fifty years have not been particularly “democratic.” If people prefer to move from a very poor, dysfunctional “democracy” to a rich, efficient, less democratic form of governance, then they should be allowed to do so. For instance, on The Economist’s 2020 Democracy Index, Uruguay is ranked the 15th most democratic nation in the world, with a GDP per capita of $17,000K per year. The United. States. is ranked the 25th most democratic nation in the world, with a GDP per capita of $63,000K per year. Should the U.N. forbid Uruguayans from emigrating to a less democratic regime such as the U.S.? India is ranked 53rdt, with a GDP per capita of $2,000. Should Indians be outlawed from going to work in the UAE, ranked 145th but with a GDP per capita of $43,000K?

Singapore and Hong Kong are tied for 75th place in the Democracy Index. UAE is 145th. There are an estimated three3 million Indian nationals working in Dubai, all of whom have voluntarily left 54th ranked India for 145th ranked Dubai, where they have no rights. Why are people willing to leave a more democratic nation for a less democratic nation? For the same reason millions of Africans risk their lives crossing the Mediterranean in attempts to get into Europe, or millions of Latin Americans risk their lives getting into the U.S. As illegal immigrants, they typically do not have the same legal rights in Europe or the U.S. as they would have had when they stayed in their home countries. The fact is, according to Gallup, as of 2018, 750 million people would emigrate from their home countries if they could, mostly from poor to rich nations.

We know that monopolies and oligopolies tend to be less innovative than are more open markets with greater competition. The global club of nation states acts as an oligopoly, largely preventing the emergence of new jurisdictions. While there are nearly two hundred nation states, at present most of them limit immigration— – while also preventing the emergence of new jurisdictions which might welcome those hundreds of millions of aspiring emigrants.

As a consequence of this oligopoly of nation states that restrict new entrants into the jurisdiction marketplace, jurisdictions such as the UAE that import a significant percentage of their workforce find an immense demand from prospective job seekers. As bad as the human rights situation is for foreign workers in Dubai, it is less bad than, say, is the situation in Saudi Arabia. But as long as we have 750 million people eager to leave their home countries for a better life elsewhere (reserve army of labor, in the Marxist framework), then recipient jurisdictions do not need to compete with respect to rights. Urban wages in China remained low until the deluge of rural workers to urban areas finally slowed down in the past decade or so, which ultimately resulted in the need for greedy, unregulated capitalist businesses to pay workers more. The dramatic increase in wages in China was driven entirely by the demand for workers finally exceeding the supply.

Likewise, in a global market of jurisdictions competing for labor, we will gradually see wages and working conditions improve. Most nations so dramatically constrain entrepreneurial value creation by means of legal obstacles that global job creation may be orders of magnitude less than what it would be in a world of competitive jurisdictions. For instance, imagine a world in which our current models of efficient government, such as Singapore, Estonia, Denmark, and New Zealand, were regarded as antiquarian relics, the “Model T” primitive technology as compared to state of the art e-government. Our interactions with governance services should be as streamlined as are our interactions with our favorite e-service providers— – and constantly improving due to ongoing competitive pressures.

Demand for labor has always been the primary driver of improved wages and working conditions— – not unions and labor regulations. Around the world today, most poor nations have extensive labor protections in their laws— – but as long as their adverse business environments prevent a competitive labor market from coming into existence, workers are paid poorly and treated poorly regardless of the laws on the books. (A Bangladeshi trade union associated organization, BILS, had praised Bangladeshi labor law as “fairly comprehensive and progressive” in 2010, law a few years before the 2013 Dhaka factory collapse there killed thousands.).

A world of competing efficient governments will be a much more prosperous world in which arbitrary barriers to entry no longer exist; legal services will be swift, cheap, and efficient; payment for government services will become small autopays instead of “tax filing” each year; and entrepreneurs will be allowed to create high- quality, low- cost services meeting the niche needs of what are currently low- income populations around the world.

So why aren’t we aggressively pursuing a world of competitive governance?

The good news is that some of us are: Charter Cities Institute, Startup Societies Foundation, Free Private Cities, Pronomos, Prospera, and others. On June 12, 2021, the Effective Altruism Forum posted an “Intervention Report: Charter Cities,” an overview of Charter Cities from an effective altruism perspective. To their credit, one of their conclusions is that beyond whatever immediate benefits from creating prosperity in a particular location, the real benefits consist of “exploring alternative policy and governance possibilities and scaling up successful ones.”

This is a key insight. This kind of thinking is a sine qua non to accelerating human betterment.

In a future essay, I’ll introduce the less familiar concept of entrepreneurial markets in culture and community, the more important benefit for increasing both quality of life and social mobility for all.

Footnote: In 2009, Patri Friedman, extending the legacy of his father’s and grandfather’s work, launched a blog, “Let a Thousand Nations Bloom: Towards a Cambrian Explosion in Government.” The foregoing description of an entrepreneurial ecosystem supportive of continuous innovation in law and governance is very much aligned with, and inspired by, David and Patri Friedman’s work, so much so that it might more justly be described as “Friedmans’ Law.” Of course, David Friedman already proposed a “Friedman’s Law” that is a cousin of Strong’s Law:, “It costs any government at least twice as much to do something as it costs anyone else.” That said, Patri extended his father’s work to agnosticism regarding the structure of government and towards an evolving ecosystem of competitive governance, which would likely result in higher quality, lower cost, and more niche offerings.

Michael Stronghttps://socraticexperience.com
Michael Strong is founder of The Socratic Experience, a virtual school, author of The Habit of Thought: From Socratic Seminars to Socratic Practice, and Be the Solution: How Entrepreneurs and Conscious Capitalists Can Solve All the World's Problems, blogged at Let a Thousand Nations Bloom, and promotes Startup Cities in Latin America and Africa with his wife, Magatte Wade.