Why We Need More Charter Cities

Written by Joe Lonsdale

‍@JTLonsdale

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Over the last few centuries, most of our world has become incredibly prosperous relative to the past. When entrepreneurs compete to offer better goods and services, good ideas “win” and spread. Older, less effective ways of doing things wither and die. As basic research and scientific breakthroughs advance what’s possible, entrepreneurs with ambitious visions introduce new and better ways of doing things. In an open society with a market system, each of us is incentivized to learn from what works and creatively solve problems for each other. This is why our economy continues to grow, and goods and services continue to improve over time.

As the world’s economy has grown more and more dynamic, governments haven’t kept up. Competition has destroyed many lumbering corporate bureaucracies; government bureaucracies have only grown. Automobile speed, safety, and reliability have increased by countless orders of magnitude since the invention of the Model T Ford; the time it takes government to build needed infrastructure has skyrocketed. Decades of innovation in infotech and logistics have brought us just-in-time supply chains and efficient procurement. Government procurement in America hasn’t kept up with these best practices because it lacks transparency, incentives, and accountability. One example – out of thousands – that is particularly salient and frustrating today is that the US government spent millions on a contract for in- case-of-emergency ventilators that were never delivered even as COVID-19 became a national crisis. It’s obvious that the forces tied to our growing prosperity haven’t trickled over to public policy. 

I am an American patriot and continue to spend much of my career helping to fix the government we have. Thousands of governments work with software companies I have founded such as OpenGov, Esper, and Palantir, which help better allocate trillions of taxpayer dollars, bring data and transparency to the regulatory state, or use cutting-edge technology to enable new workflows to achieve public policy goals and save billions of dollars compared to how things were done before. We’re proud to have partnered with extraordinary people in government to achieve great things. But fixing government from the inside is not enough; American government is too big and too entrenched in outmoded processes and only loosely accountable to the American public. 

This is why I’m attracted to the concept of “charter cities”: legally independent city-states, or “special economic zones” which are free to innovate and establish better modes and methods of government than existing players. We should combine the lessons from the past century with new technologies to improve transparency, hold public servants accountable, and make government work better. The best way to drive innovative governance is for governments or aspects of governments to compete for citizens just as companies compete for customers. Governments must constantly innovate, respond to changing circumstances, and invent or adopt better ways of doing things – or else lose out to competitors. 

I support the work of Patri Friedman at Pronomos Capital, Mark Lutter at the Charter Cities Institute, Balaji Srinivasan, and others in the space on the conviction that the concept of a charter city is revolutionary. Layers and layers of bureaucracy, lack of accountability, and other mistakes have enabled cost disease and crony capitalism in critical sectors, reduced the dynamism of our economy, and made the cost of living skyrocket for our middle and working classes. We need a revolution in governance. 

It’s difficult for human beings to understand the idea of positive-sum growth. Intuitively, anything my neighbor gains is a loss for me. In one sense, that’s true. As Nobel prize-winning economist Paul Romer explains, the world of physical objects – or collections of atoms – is finite and zero-sum. Any object I obtain is a loss for you and vice versa. So how is positive-sum growth possible? Ideas. Good ideas rearrange the world in ways that make the things in it more valuable. 

The practice of farming, for example, didn’t create new atoms even as it dramatically expanded the food supply. It was a good idea that changed the world to make it more useful, allowing humanity to support a larger population at less cost. Bad ideas do the opposite. Soviet collectivized farms, for example, cost millions of lives. 

Markets are positive-sum because good ideas are valuable. If I buy something from you, I’m telling you that I value what you’ve made. If you make a profit, it means you’ve increased the value of whatever raw supplies you started with. If you make a loss, you’ve destroyed value. A free market without cronyism is a machine that increases the value of the world by rewarding good ideas and punishing bad ones. When ideas compete, we all win because the best ideas change the world in ways that make all of us more prosperous. 

Some of the most powerful ideas find expression in our laws and shape the actions of entire communities. The best collections of ideas – such as the United States constitution or English common law – don’t just change the physical world but establish frameworks within which people may act. Good laws make for a more prosperous society. Bad laws, such as those in Venezuela or North Korea, can have disastrous effects on everyone. 

Unfortunately, governments improve more slowly than individuals and corporations because they face much less competition and their citizens have little choice. When a company does things badly, consumers punish it by buying a competitor’s product. But if your government taxes you to pay for something that’s wasteful or inefficient, you can’t respond by not paying taxes. You can try to help design and support a more efficient version of the scheme, but politics, unlike markets, are not generally a place where the best ideas win or where the relevant ideas are even discussed. Ultimately, bad policies reduce economic growth and decrease tax revenues, but this takes years or decades, and government today is such a giant kludge of disparate aspects that it’s hard to tell which policies were at fault. 

In theory, people can always move from one country to another. One might think that the threat of political “exit” would force countries to compete for citizens just as companies compete for customers – and to some degree this does happen at extremes. Countries with better laws attract more citizens and tax revenue and prosper over time [such as net inflow into the US]. Countries with bad laws lose population and power [such as Venezuela]. But there are serious barriers to political exit. It’s time- consuming and expensive to move, and it’s sometimes difficult to get permission to enter a new jurisdiction. Further, many countries have distinct advantages – such as tremendous natural resource endowments – that shelter them from the consequences of mismanagement. Finally, the best countries attract talented individuals who themselves attract others, and though laws make a difference over the long-run, network effects can persist for a long time even when beset by poor government. 

Charter cities are new cities, founded on unpopulated land [we are lucky – the vast majority of land is still open!], which are allowed autonomous commercial law and semi-autonomous governments and justice systems. The idea is simple: found new cities, free from old bureaucratic and legal structures, and explore bold new visions of how government should work. Market them to people who choose to join and see what the world learns. 

Charter cities must attract new residents to survive. This is a powerful incentive to make laws clear and fair, build responsive public institutions, provide economic opportunity, and come up with new ideas to outcompete incumbent competitors. There’s no one way to achieve these ends, so charter cities will also compete with each other to design and implement innovative governance regimes. 

We know that competition in government works because it’s been done before. The United States, for example, is prosperous in part due to a federalist system that forces each state to compete as a laboratory of democracy within a federal framework that makes it easy to move from state-to-state. 1846, for example, New York became the first state to fully abolish rules for corporate charters under which corruption was rampant because the legislature used to decide which businesses were allowed to incorporate. Over the latter half of that century, this measure spread from state to state and became ubiquitous. 

Of course, the biggest success stories come from the most radical experiments. Over the course of a century, Hong Kong developed from a standard port city into one of the most prosperous cities in the world – even as mainland China stagnated under communism. Good laws made Hong Kong wealthy. The Chinese, recognizing this, set up in 1980 a special economic zone in the Shenzhen area nearby where some normal economic restrictions were waived to more closely resemble Hong Kong. The area grew by more than an order of magnitude in population and prosperity in the first 20 years of its existence. Deng Xiaoping’s special economic zone experiments were the basis for China’s gradual liberalization. By showing what kinds of laws attract capital and commerce, Hong Kong and Shenzhen transformed all of China. 

The most successful charter cities will likely guarantee and protect individual liberties, have a fair legal system with clear and just laws and decisions based on precedent, and treat businesses and workers fairly with a transparent regulatory structure. These features have made several small cities like Hong Kong and Singapore incredibly prosperous and have brought them countless new citizens. I expect that broadly similar systems would do the same for other new cities, aided by new types of transparency and accountability in government, and I have a lot of ideas. But the amazing potential of charter cities is that I might be wrong. Perhaps there’s a much better way to do things – a fairer way of making judicial decisions, of taxing corporations, or of ordering society. If there is, competition will prove it and the world will benefit. 

Despite the incredible potential of charter cities, there are serious challenges to their practical success. First is the problem of violence or “national defense.” It’s hard to make sure that a charter city will remain independent. Investors rightly fear that money spent on new infrastructure will be wasted if the local government revokes the prospective city’s rights and seizes control – a serious problem in general as governments don’t like more successful competition! Second, building any new city is very expensive. It costs a lot of money up-front to build roads and bridges and other infrastructure. Building a city on new land that has few established connections to other cities, or connections that couldn’t bear a huge influx of new citizens, is even costlier. Third, cities have amazing network effects – it’s difficult to grow a new city from scratch. Big cities attract talented people who attract other talented people in what economists call “agglomeration effects.” Cities don’t just compete on the quality of their governments but on the quality of their private citizens. In that respect, new charter cities start off at a serious disadvantage. 

These problems will plague any attempt to establish new cities. But there are ways to ameliorate them. Building near an existing city, for example, would reduce the early deficits of amenities and people – problems two and three. A charter city could start as a satellite of a larger city or near a good airport. In this way, the city would directly compete with and attract citizens from nearby. And though this early challenge is substantial, it is less substantial now than at any point in history. It has never been easier to move elsewhere, and communication technology helps us profit from the expertise and ideas of other people from thousands of miles away. 

In my view, the best way to get a charter city off the ground is for a strong nation with a stable and fair political system to “sponsor” and protect the charter city on the model of Hong Kong – initially protected by the United Kingdom. This city enriched the world with its goods and taught the world about how to build effective institutions and design good laws. But the most lucrative benefits accrued to the UK and mainland China. Both benefited from Hong Kong’s goods and the prosperity it created, and China thrived after instating sweeping economic reforms inspired by Hong Kong’s model. It would be in the interest of a powerful state sponsor to provide some of the capital necessary for a new city to thrive and to protect that city in its infancy. And charter cities will only thrive if they are able to defend their wealth with military force. 

Imagine, for a moment, a world in which hundreds of legally independent city-states compete to attract citizens. In this world, charter cities would bring the powerful positive-sum dynamics of markets to governance. People would enter and exit jurisdictions freely, and charter cities would compete with each other for citizens by offering better services and fairer laws. Those that succeed would create incredible prosperity for their citizens and set the standard for the rest of the world. Those with below-average laws and institutions would quickly fall behind and be forced to adapt or lose population and become irrelevant.

We should draw inspiration from the concept of the charter city in crafting policy frameworks, and celebrate the efforts of the people who have embraced the thankless and too quickly mocked task of working to make these cities real. Like any ambitious idea, there are serious challenges to making a new charter city successful in practice. Building one of these is likely at least 1000 times harder than building a big company. But if we succeed, we’ll inspire other governments and start a new renaissance that will improve billions of lives. 

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Joe Lonsdale is an American entrepreneur, investor, and philanthropist.

Joe is the Co-Founder of Palantir, Addepar, OpenGov, Affinity, Esper, and other mission-driven technology companies, and The Cicero Institute and 8VC.

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