With the support of the Atlas Network, CapX is publishing a new series of essays on the theme of Illiberalism in Europe, looking at the different threats to liberal economies and societies across the continent, from populism to protectionism and corruption.
With the rapid globalisation that began after the collapse of the Eastern bloc, much of the world got richer quickly. China and India’s partial liberalisations lifted more people out of poverty than any event in human history. Though faith in socialism waned, most regimes were unwilling to liberalise completely, and so a hybrid economy became increasingly widespread. Private enterprise would be tolerated, but not without considerable state intervention and regulation. Different degrees of corporatism — state-directed and regulated industry — came to dominate the global landscape.
The downside of these hybrid – soon christened ‘neoliberal’ – economies has been the inevitable collusion between industries and the state, which exacerbates inequality and leads to corruption. But we must always ask: “As compared to what?” The upside, of course, is billions coming out of penury.
But what about the supposed downsides?
“Neoliberalism in any guise is not the solution but the problem,” writes Nancy Fraser, an academic at the New School. “The sort of change we require can only come from elsewhere, from a project that is at the very least anti-neoliberal, if not anti-capitalist”.
And yet such “change,” which can only arise out of some degree of authoritarian intervention, is precisely what put the ‘neo’ in neoliberalism. Liberalism’s detractors would rather authoritarians ensure equal poverty than liberal prosperity unevenly distributed. And yet, most of the problems that persist as developing countries liberalise persist to the extent that they impose regulatory burdens that match the capacity of wealthier states. Alex Tabarrok and Shruti Rajagopalan refer to this as examples of the “flailing state”.
The alternative, they argue, is a higher degree of liberalisation; because in flailing states, the limited capacity of state regulators means classic problems of favour-seeking become magnified. Officials see opportunity in taking bribes; the public expedite things by paying them. Savvy entrepreneurs figure out how to game the inadequate system, which allows them to gain an advantage over competitors.
Intervention, then, begets cronyism.
That’s why some liberals are pushing back against the charges. Philosopher Jason Brennan writes:
‘You complain, perhaps rightly, that corporations are just too big. Well, yeah, we told you that would happen. When you create complicated tax codes, complicated regulatory regimes, and complicated licensing rules, these regulations naturally select for larger and larger corporations. We told you that would happen. Of course, these increasingly large corporations then capture these rules, codes, and regulations to disadvantage their competitors and exploit the rest of us. We told you that would happen.’
In other words, one can hardly blame the ill effects of neoliberalism on it’s more liberal aspects. When you mix an overweening regulatory state with entrepreneurial capitalism, you get crony capitalism and corporatism. Yet for the extent to which neoliberalism has been liberal, we have seen unprecedented gains in human wellbeing.
First, there has been extraordinary economic growth around the world — with India and China leading the way, but also with significant growth in other developing countries. This has led to a massive decline in the share of the world population living in extreme poverty, from about 35% in 1987 to under 10% in 2015 (the latest data available).
Second, global life expectancy is rising. Average life spans for both men and women increased by more than six years between 1990 and 2016. The gains were largest in poor countries. By now this should be old news.
It must be said that for those who have lost their jobs to offshoring, the abstraction of global uplift doesn’t measure up to the acute pain of regional displacement. But even regions that have struggled to compete have enjoyed greater overall purchasing power. Rust-belt areas that have diversified their economies have come back stronger: whether Pittsburgh in the U.S. or Manchester in the U.K.
Some on the academic left would argue that recent global gains among the world’s poorest are either mere correlation, or are primarily consequences of philanthropy and foreign aid. Some even suggest that the wealthy nations of the world only got rich thanks to exploitative colonialism. Even if poverty reduction and improved life expectancy had been the result of philanthropy and aid, these sectors exist thanks to profit-seeking enterprises. And, of course, there are plenty examples of tiger economies that haven’t relied on colonialism for their economic success — from post-Soviet Estonia to any of the Asian Tigers.
No, the increase in global growth is primarily a factor of productivity increases achieved by liberalism. A pre-Gutenberg Bible that took 136 days of work to print can now be produced in the thousands in a matter of minutes. “Capital became productive because of ideas for betterment” writes economic historian Deirdre McCloskey, “ideas enacted by a country carpenter or a boy telegrapher or a teenage Seattle computer whiz.” As Matt Ridley would say, it’s all the ‘ideas having sex’ in fertile entrepreneurial soil. Productivity increases follow better rules and recipes: the rules are the institutions most hospitable to entrepreneurs; and recipes are knowledge that allows producers to generate greater abundance with fewer resources. The question now is, how to keep this growth going?
The evolution of Liberalism: The niche
Only thirty-five years ago, 350,000 people lived in a coastal town along the Persian Gulf. Today, that population has ballooned to 3 million. With such staggering prosperity, Dubai has changed its coastline, and added artificial land, buildings and ports. An immediate implication of the success? Do more.
Establishing niches has been one of the most successful ways to bring about economic growth ever devised. Critics argue that the neoliberal order was driven primarily by a political cabal called the “Washington Consensus”. It turns out, however, that many of the changes came internally from wise decision-makers in developing countries, perhaps struck by the fantastic performance of niche economies like Hong Kong. That city-state, built on a rocky island, had been left to thrive in a structure of good rules stewarded by a British Financial Secretary, Sir John Cowperthwaite.
“I came to Hong Kong and found the economy working just fine. So, I left it that way,” he said before his death. Cowperthwaite’s simple rules and hands-off government in the twilight of Britain’s empire gave rise to the shining city-state that the world admires today.
Since the small Irish town of Shannon established the world’s first special economic zone (SEZ) in 1959, a number of countries have followed suit. China under Deng Xiaoping instituted some of the world’s most successful SEZs, including it’s first, Shenzhen, in 1979. Others copied. Their performance has lifted more people out of poverty than any reform in human history.
The downside of the traditional SEZ, though, is that most only allow for tax and duties relief. For any other major issues, including commercial dispute resolution, one has still to deal with flailing, often corrupt states. (Dubai avoided this problem by building in a commercial dispute resolution system called the DIFC, which imported UK Common Law.)
With the traditional SEZ, we’re not as likely to see the kinds of experimentation needed to discover new ideas for government. Most SEZs have models that, though they work, retain some of the more corrosive aspects of hybrid liberalism, the corruption of which (again) liberals have warned “would happen”.
Free Private Cities: The next stage
In the interests of full disclosure, I am not only an impassioned advocate of special jurisdictions, I am leading an organisation that will help bring these Free Private Cities into existence. And yes, negotiations with interested governments have already begun.
So what is a Free Private City? Imagine a private company offers you the basic services of a state, such as the protection of life, liberty and property, within a territory. You pay an expenditure-based amount for those services. Apart from that, you’re free to do as you choose. Your rights and obligations are laid down in a contract with the provider. Conflicts about its interpretation go to independent arbitration. Thus, as a contracting party, you’re on an equal footing with the governance service provider. Your legal position is secured as opposed to being subject to the whims of politics.
Why Free Private Cities as opposed to the standard model of governance? There are six reasons:
- Certainty. The city operator cannot change the contract unilaterally. Clear, stable and understandable rules of the game – the result of an actual contract struct between citizen and city – reduce what economist Robert Higgs refers to as “regime uncertainty.” Such clarity and stability makes it more likely that investors can send capital into support budding enterprises.
- Recourse. Under conditions of “sovereign immunity,” citizens have little recourse when police or authorities abuse their power. Government justifies its authority though appeals to an abstract “social contract”. New regimes, claiming mandates for change, can make life tough for ordinary people and businesses. Their only recourse is to pray for change during the next election cycle–if there is one. In a Free Private City, the contract is real.
- Scale. What is the optimum size of a jurisdiction? How many people should be governed? Answers to these questions are debatable, but when we consider that some of the most stable and prosperous societies are reasonably small — e.g. Hong Kong, Dubai, and Luxembourg — there is a strong anecdotal case for bottom-up, location-specific governance.
- Competition. The difference between a collection of small jurisdictions and one massive monolithic jurisdiction is that, in the former, you get pluralism, experimentation and competition. In short, if you don’t like Hong Kong, you can vote with your boat.
- Experimentation. Nobel laureate in economics Douglass North reminds us that, “The organisations that come into existence will reflect the opportunities provided by the institutional matrix.” Based on the rules, you’re more likely to get either more piracy or more productivity. But to find out what works best, let’s run multiple experiments.
- Skin in the Game. The incentives for the Free Private City operator are fundamentally different from legacy states. First, the operator has a direct economic interest in the success of the community. Second, the operator can be held liable for errors and cannot conceal responsibility or shift costs. Finally, unhappy customers will exit.
I am under no illusions about the words “free” and “private,” which carry certain stigmas. But when one considers that private in this context means contract-based provision of both “public” and “club” goods, some of those stigmas should fade.
Some might say this is all wishful thinking. After all, why should existing states, whose consent is needed, get involved at all? As with the Free Imperial Cities of the Middle Ages, there is only one reason: self-interest. States may agree to surrender part (not all) of their sovereignty over a given territory when they expect to benefit. And they will.
Take a look at Hong Kong, Singapore or Monaco. Near each, a belt of prosperity has grown up around them in neighbouring countries. Its inhabitants pay taxes in those neighbouring countries. The city-states create jobs for commuters from the surrounding countries who might otherwise have remained unemployed. If a Free Private City is created in a previously structurally weak or uninhabited area, then the host state has nothing to lose and everything to gain.
There may be special circumstances in which Free Private Cities are a credible solution, such as the establishment of security zones or refugee cities in former civil war zones. In such cases it may be best to entrust the zone’s administration to an impartial and accountable entity.
Liberalism under siege
Today it would appear the liberal order is beset by wolves. Eerily reminiscent of the early twentieth century, authoritarians of both nationalist and socialist camps are attacking from all sides. But liberalism’s evolution can balance concerns of each, leaving room for both cultural self-determination and cosmopolitanism; a robust commercial life and protections for the weak.
Writer Zach Beauchamp ably defends the liberal order at Vox:
“Given that people will always disagree about politics, liberalism’s core aim is to create a generally acceptable mechanism for settling political disputes without undue coercion — to give everyone a say in government through fair procedures, so that citizens consent to the state’s authority even when they disagree with its decisions”.
And this way of dealing with the fact of pluralism has been a strength of the liberal order, until those fair procedures are jettisoned. The next stage of liberalism’s evolution will come about by improving procedures.
In this way, the privatisation of law — for small, experimental jurisdictions like Free Private Cities — is liberalism’s last mile. Law will come to be tested within an evolutionary fitness landscape. Good law survives.
Some will say that this form of liberalism can only fracture societies further. I argue that in the process of creating new niches, we are searching for forms of governance that will give rise to stable societies that accommodate different conceptions of the good. After all, one size doesn’t fit all. And that’s precisely why liberalism becomes the unifying superstructure for diverse communities, cultures and commercial relationships.
No other form of government can make this claim. That’s why no other form will triumph in the long run.
CapX depends on the generosity of its readers. If you value what we do, please consider making a donation.