Building Autonomous, For-Profit Cities

Introduction

In 2002, no privately funded rocket had ever reached orbit. Building rockets was the sole domain of governments, and sometimes big defense contractors. In fact, building rockets was not the domain of all governments, only those in developed countries or with large populations. An independent private aeronautics industry was unthinkable.

In 2002, Elon Musk founded SpaceX. In 2008, SpaceX sent the first privately funded rocket into orbit, achieving a feat most thought impossible.

In 2015, SpaceX successfully landed the first stage of their rocket after reaching orbit. Blue Origin, a company founded by Jeff Bezos, had accomplished a similar, though less complex feat earlier in the year. Landing the first stage of a rocket allows all components to be re-used, drastically cutting costs. No government has accomplished this feat.

The success of SpaceX, and to a lesser extent Blue Origin, have upended conventional wisdom in aeronautics. SpaceX has not only performed the same tasks as government space programs, but cut costs and innovated. As such, it is not an exaggeration to say, “The Private Space Age Lifts Off”, as Popular Mechanics entitled one of their podcasts.

This new space industry did not emerge pursuing huge profits. Making money is a means to an end. Instead, their goal is making humanity a “true spacefaring civilization and even a multi-planetary civilization.” Only by colonizing multiple planets can humanity avoid existential threats.

With humanity concentrated on earth, an errant asteroid could wipe out civilization. Nuclear war could end human life. Rogue AI could eliminate humanity. Colonizing other planets limits the destructive potential of such threats. If life on earth is wiped out, Mars would still thrive. Private space exploration literally has the potential to save humanity.

In other words, the private sector disrupted an industry traditionally dominated by governments. The private sector has cut costs and accomplished previously unimaginable feats. The private sector is offering a solution to one of humanity’s most pressing problems.

There is another stagnant and unresponsive industry, dominated by governments, which the private sector can disrupt. Like space exploration, disrupting this industry could hugely benefit humanity. Instead of protecting humanity from existential threats, this industry can lift hundreds of millions of people out of poverty. This industry is territorial governance.

Like the space industry before it, territorial governance is stagnant, bloated, and ineffective. Developed countries face unsustainable unfunded liabilities while chasing away tech innovation. Undeveloped and developing countries face even bigger problems. Their laws and regulations exist largely to prevent open access from new businesses into the marketplace. By closing their economies in a morass of red tape and protecting well connected cronies, undeveloped and developing countries prevent economic growth, ensuring their citizens remain impoverished.

Also like the space industry, improving governance would hugely benefit humanity. China, because of governance reforms, has lifted an estimated 500 million people out of poverty. Improving governance in Asia or Africa would have similar effects. In developed countries, improved governance could improve the rate of technological growth. Google, for example, has limited investment in healthcare because of onerous regulations.

Proprietary Cities

This combination of factors provides the right opportunity for the private sector to step in, improving territorial governance. Proprietary cities are one mechanism for doing so. Proprietary cities have three defining characteristics. First, retained land ownership by a for-profit company, the proprietor. Second, substantial autonomy in governance from the host country. Third, the proprietor having meaningful influence over the construction of a new regulatory and legal system.

Revenue in a proprietary city would be raised through the application of a land value tax. A land value tax is less distortive than most taxes, as the supply of land cannot be reduced. Further, because the proprietor’s revenue is based on land prices, they are incentivized to promote economic growth to increase the land prices.

The advantages of proprietary cities are twofold. First, building a new city in an uninhabited area increases the likelihood of achieving autonomy in governance. No politically connected groups or individuals stand to lose rents if autonomy in governance is granted to a backwater. Second, the proprietor will be incentivized to promote the long term economic health of the residents. By virtue of retaining land ownership, the profits of the proprietor depend on their ability to increase land values.

A proprietary city could attract residents and businesses by improving governance. Private property, economic freedom, and rule of law are the building blocks of economic success. A proprietary city which formulated clear to follow laws and regulations which encourage commerce and investment could quickly grow.

For example, in 1980 Shenzhen was a fishing village of 30,000 people, lucky enough to be located near Hong Kong. Now, the greater metropolitan area has 18 million residents. This extraordinary rise began in 1980, when Shenzhen was designated as a special economic zone, allowing foreign direct investment. During the first year of its existence, the special economic zone in Shenzhen attracted over 50% of all foreign direct investment in China.

Similarly, Dubai in 1968 had a population of 58,971, by 2015 the number had boomed to 2,439,289. Dubai’s success, especially compared to their United Arab Emirate neighbors, is largely attributable to the creation of special economic zones. For example, to become a leading financial center, Dubai created the Dubai International Financial Centre, hiring a British judge to serve as Chief Justice.

A proprietary city, implementing comparable laws and regulations, could achieve similar success. This is especially true in countries with large rural populations that are rapidly urbanizing.

Policies

The extent of autonomy in governance will likely determine the fate of a proprietary city before the first resident moves there. If the autonomy in governance involves cutting around the edges of the existing legal and regulatory systems, the proprietary city will be unable to attract residents and businesses. If, on the other hand, the proprietary city achieves legal and regulatory autonomy, they will be able to quickly grow.

As such, an independent commercial justice system is the cornerstone for a proprietary city. An independent justice system will not only assure companies their investments are safe; it will also be seen as a litmus test for how committed the host country is to ensuring the autonomy of a free city. Common law is generally regarded as the best legal system to stimulate economic growth. A proprietary city could hire a common law judge to administer their legal system to credibly commit to ensuring integrity.

Autonomy in business regulation is also important for a free city. Developing countries typically have large informal sectors of the economy driven partially by the high cost of registering for the formal economy. Ensuring previously informal businesses enter the formal sector will allow them to legally scale their business and take advantage of legal protections. To achieve this, registering a business should, at most, take one day and cost 5% of annual per capita income.

Labor laws which depress growth are also depressingly common in the developing world. Increasing the difficulty of terminating employment reduces hiring rates. To have a dynamic economy, a proprietary city needs labor laws which do not favor employed workers over those seeking work.

A proprietary city should also offer tax relief for its residents. Lowering and simplifying taxes will keep more money in the hands of producers, stimulating economic growth.

Implementing these policies would attract businesses and residents, ensuring the city would quickly grow.

Viability

Even if proprietary cities could improve territorial governance, there remains a question. Are free cities viable? Could a developer raise the billions of dollars necessary to build a city? Could a country grant the type of autonomy necessary to jumpstart institutional growth? The answer to both questions is a qualified yes.

The New Cities Foundation writes, “If new cities of the past were spearheaded by the public sector, private stakeholders are the undisputed driving forces behind current projects.” Lavasa, for example, is a small city being built in India meant to house 300,000 people over 100 square kilometers. It is being built and will be governed by Hindustan Construction Company. The estimated price tag of the project is $30 billion. Songdo International Business District in Korea was a $35 billion project meant to be the centerpiece of Songdo, a new city near Incheon. That these sums were privately raised demonstrates that the constraining factor to proprietary cities s not money.

Special economic zones (SEZs) are, in some ways, similar to proprietary cities. SEZs create local pockets where certain national laws and regulations do not apply. As such, the likelihood of creating a proprietary city is correlated with the number of SEZs.

Over the last thirty years, there has been an explosion in the number of SEZs. Ireland founded the first one in 1959. For the next twenty years’ growth in the number of SEZs was relatively slow. However, in the 80’s growth accelerated, accelerating again in the 90’s. Currently there are over 4,000 SEZs worldwide.

The infrastructure of many of these zones is privately developed. In fact, The World Bank states that “private zones are less expensive to develop and operate than their public counterparts (from the perspective of the host country), and yield better economic results.” This, of course, does not relate to the governance of zones. However, given that governance is a public good which increases the value of land, similar to infrastructure, the same logic which leads to private zones performing well would lead to proprietary cities being well governed.

Both trends, the increasing role of the private sector in city development and the decentralization of laws and policies through SEZs are leading to the possibility of proprietary cities.

Next Steps

The final leap realization necessary for proprietary cities to become politically viable is the inclusion of the proprietor in legal and regulatory governance. Developers are already included in the provision of traditional public goods, primarily infrastructure. However, as territorial governance has historically been the exclusive role of the state, giving the private sector a role in governance is a line that has not yet been crossed.

Luckily, that is changing. Honduras, for example, also passed a law which allows for the creation of zonas de empleo y desarollo economico (ZEDEs). Though Honduras is still implementing the law, a ZEDE could be a free city. A for profit developer could own the land, have substantial institutional autonomy, and influence the new legal and regulatory system.

More promisingly, Peter Thiel recently publicly stated that he would invest $50 million in a private city. While he did not clarify how he defined public city, given his involvement with the founding of the Seasteading Institute and his Cato Unbound article, it is reasonable to assume his use of private city is similar to how I have defined proprietary cities.

Realistically, the first proprietary city would be a proprietary suburb. A suburb with 100,000 residents is large enough to gain the benefits from good governance, and can serve as a low risk proof of concept for future projects.

The first proprietary city should also be based in a developing or undeveloped country. Governance in the developed world tends to be good. In developing and undeveloped countries, there is a great deal of room for improvement. Further, developed countries are typically urbanized. Attracting rural workers is easier than enticing urban residents to move to a new city.

There are several ways to turn the final leap into a series of small steps. One possibility, Thiel, or a similarly minded wealthy individual could create a ‘prize’, to induce countries to offer the necessary autonomy. Thiel could write a set of conditions which would trigger his investment. If two or three countries are interested, there could be a bidding war to create the optimal conditions for Thiel to invest.

For those of us, like me, who lack Thiel’s resources, we must be more resourceful. The basic process I envision is a careful dance between potential host countries and potential investors. If a potential host country demonstrates interest, that interest can be taken to investors to begin to raise money. If a prominent investor invests in your proprietary city company, you can go to potential host countries using the investors name as leverage.

While this level of negotiation is tricky, it should not be impossible. For example, there are ways to overcome fears of private territorial governance. The legal and regulatory body, for example can be controlled by a board of ten people. The proprietor can be given three seats on the board. The UN or World Bank can be given another three seats. The host country can be given the remaining four. With that being said, the details would, of course, have to be worked out in negotiations.

After autonomy is guaranteed the process becomes easier. Debt can be used to buy the land and make the necessary infrastructure improvements, while equity can be used to finance the construction of the legal and regulatory systems.

Building the infrastructure will be relatively simple. There are many construction companies with a great deal of experience building roads. Designing the legal and regulatory systems, on the other hand, will be tricky. There are few precedents. Luckily, the bar is fairly low. Attracting foreign investment and creating jobs does not require an ideal legal and regulatory system, merely one better than nearby options.

Another aspect to consider is attracting an anchor tenant. No one wants to be the first person to move to a city, none of the usual city amenities would exist at that point. Attracting an anchor tenant which can build a factory to create several hundred, or thousand jobs, would help overcome the first mover problem.

Conclusion

I believe territorial governance is the next stagnant, bureaucratic industry to be disrupted. Doing so could have immense welfare effects for humanity. I have laid out why I believe proprietary cities are important, why their time is now, and the steps necessary to build them. In fact, a company, Sui Generis, was recently founded to build for-profit city-states.

I would very much appreciate any feedback, especially on the steps necessary to build proprietary cities. I encourage you to comment on the article or contact me through Twitter.