Re: Founding vs Inheriting · by Maxwell Tabarrok

Last week, Balaji Srinivasan wrote an interesting blog post comparing institutions where those at the top are founders to institutions where power is distributed via inheritance. He finds that institutions run by founders have numerous advantages, but most relevant to our time is their ability to reinvent themselves in the face of a disaster or societal shift like the COVID-19 pandemic. In our present society, the pandemic exposed numerous examples of inheritance institutional failure along with several examples of founder success. Picking leaders based on their ability to build capable institutions has many clear advantages over heuristics like primogeniture or popularity. The difficult question is how to effectively integrate founders and competition into the provision of services typically provided by governments like law, security, and schooling.

Private cities, New frontiers, and Crowd choice

There are three non-exclusive ways to integrate founders into government that are more or less within our current technological capabilities: Private cities, creating a new frontier, and crowd choice bargaining.

Private cities are an extremely exciting idea. Private companies, communities of individuals, or even existing governments can contract out sections of land from other nations to create an area similar to, but a step above, Special Economic Zones. This area would have a large degree of economic and political autonomy and would hopefully act as a locus of growth and spillover effects for the host nation and the entire world. The integration of founders in this institution is obvious; instead of existing cities being run by leaders who ‘inherited’ their political position through popularity, private cities will be run by those who built them from the ground up and they will have to compete for citizens with every other city on the global stage.

The two most exciting new frontiers for crypto-libertarian types are the Ocean and Mars. This strategy has advantages and disadvantages compared with private cities. One advantage is that by expanding into currently unclaimed or uncontrolled land, founders can avoid compromises with existing governments who may wish to impose certain regulations or use violence to obtain the coveted jewel of a prosperous and growing city. The disadvantage of this strategy is that new frontiers are, almost by definition, very far away and lacking in amenities necessary for human life. New frontiers are an opportunity for founders to create new institutions and compete for settlers. They are often sources of long-term dynamism. The American frontier of the West still reverberates in the founder culture of the West Coast today.

The final and most achievable strategy is called crowd choice bargaining. The idea here is that instead of trying to get an autonomous zone granted by a government or the technology to live on mars, if you can just coordinate thousands of people to move to a certain place you can influence the policies there through collective bargaining with the mover’s tax revenues and the creation of a new voting block in the local democracy. Even though this strategy is less ambitious and has less founder control than the others, it fits much more easily into existing power structures while still allowing for competition and innovation in the provision of government services. This approach will also be a necessary stepping stone towards private cities and new frontiers because it focuses on the one obstacle that is shared by all of these strategies: coordinating thousands of people to move somewhere at the same time.

Agglomeration Benefits and Dominant Assurance Contracts

Coordinating thousands of people to do anything is difficult, but coordinating them to found a new city or community is especially hard. This is because of the power-law nature of the utility of cities. As a city grows in population, it gets more efficient; doubling the population of a city requires less than doubling of it’s energy use and infrastructure. This relationship is closely approximated by a power-law exponent of .85
Inversely, each additional person produces more than the person that came before them because of the non-linear advantages of expanding social network size and agglomeration. Doubling the population of a city more than doubles its GDP and patent output. This relationship is approximated by a power-law exponent of 1.15.

What this means is that positive sum crowd-moves or private cities will fail to materialize because of coordination failures. It may be that every one of the 100,000 people is willing to move to a city as the hundred thousandth member because the social network and agglomeration benefits are already there, but none of them are willing to commit to being the first mover.

Dominant assurance contracts can bridge this coordination gap. These contracts have two parts. First is the assurance contract. This structure has already been used in coordinated moves like the Free State Project. Basically, it is a set number of signers or amount of contribution where no one is obligated to follow through until that number is hit. In the case of a crowd choice community it might be that no one has to move until 50,000 people sign up. This structure helps coordination because no one has to commit to moving without some assurance that others will move too. Dominant assurance contract expands this by offering to pay early contributors if the project doesn’t reach its threshold. The ‘dominant’ is a reference to a dominant strategy in game theory: a strategy that you employ regardless of what others in the game do. Dominant assurance contracts make committing to crowd choice moves a dominant strategy if you have a positive private value to moving. Either enough other people sign on and you move to a new place with a preferred community and laws, or the project fails and you are paid a consolation prize.

A productized version of this, where people can coordinate crowd choice and collective bargaining through dominant assurance contracts, is an achievable first step towards much greater choice and competition between providers of government services. If coordination mechanisms like these become more common, it will be much easier for founders to organize groups and strike out into the new frontier or strike deals with existing nations to create truly voluntary, competitive, and resilient states and cities. · by Maxwell Tabarrok